Sprint's customer losses continue in 2nd quarter

Updated 8:57 a.m. PDT with information from the conference call.

Despite improvements in its network reliability and customer service, Sprint Nextel is still losing high-value customers as the company reported a wider-than-expected loss for the second quarter of 2009.

The company reported a loss of $384 million, or 13 cents a share, compared with a loss of $344 million, or 12 cents a share, during the same quarter a year ago.

Revenue also fell about 10 percent to $8.14 billion. Analysts had expected a loss of 2 cents a share on revenue of $8.13 billion, according to the Reuters news service.

As it has done in recent quarters, Sprint lost valuable post-paid customers--that is, subscribers--in the quarter just ended, albeit at a slower rate. CEO Dan Hesse said during the company's conference call with investors and analysts that Sprint has made significant progress in improving its customer satisfaction ratings, but he admitted the company is still dogged by continued customer losses.

Over the past seven quarters, Sprint has lost nearly 7 million subscribers--during the second quarter it shed about 991,000 of them, an improvement over the 1.25 million lost in the first quarter. These are high-value customers who typically sign a contract and pay monthly for their service. They tend to spend more per month than customers paying in advance for services.

Meanwhile, competitors AT&T and Verizon Wireless each added subscribers during the second quarter. AT&T added 1.4 million customers in the second quarter and Verizon Wireless added 1.1 million subscribers.

Sprint managed to improve its churn rate, or the rate at which the company's post-paid subscribers ditch its service for another provider's service, in the second quarter. But this rate was still higher than it was a year ago and still higher than rivals AT&T and Verizon Wireless. Sprint's churn rate in the second quarter was 2.05 percent, down from 2.25 percent in the first quarter. This was also higher than the 1.98 percent churn rate the company reported for the same quarter a year earlier.

Hesse said that retaining existing customers and adding new ones is a priority for the company.

"We have to increase the number of gross adds on the post-paid side," he said. "We need to have more customers coming in and a higher percentage of customers on contract. The overall issue for us is to turn around this post-paid trend."

Hesse said that the company has greatly improved customer service and network reliability. As a result its service is scoring higher in customer satisfaction surveys, but he said that it will take a long time for these improvements to manifest in improved subscriber numbers and churn rate.

"The trend line we've seen for the past three years is a reduction sequentially in gross subscriber additions," he said. "We've been working hard to mitigate that and slow the decline. We are making significant progress. But it takes a while for customer perception to catch up with reality."

Hesse blamed much of the recent customer declines on the ailing U.S. economy. A large portion of Sprint's post-paid subscribers are business customers. While these customers tend to be more loyal and generate more revenue than consumers, currently these customers are spending less on services as companies layoff employees. Hesse explained that these corporate customers aren't canceling their contracts entirely, but they are deactivating phones, which affects the company's overall subscriber count and revenue.

A boost from Boost Mobile
On a positive note, Sprint did gain strength in its prepaid business. The company added some 938,000 new prepaid customers to its Boost Mobile brand during the quarter. This was more than analysts had expected, which forecast a gain of between 500,000 and 900,000 new customers. Boost's $50 unlimited voice and data plan, which launched in January, likely helped attract many new prepaid customers.

Executives on the conference call said that Boost customers, which use Sprint's iDEN network, are starting to spend more per month on their service. And the churn is improving. But the company does see that these customers use about twice as many voice minutes and data services than post-paid iDEN customers. Still, Sprint says that it has upgraded the network to ensure it can keep up with demand.

When the unlimited service first launched, some Boost customers complained of delayed text messages. But that issue has supposedly been resolved.

In an effort to bolster its prepaid business, Sprint announced on Tuesday that it plans to spend $483 million to buy prepaid provider Virgin Mobile USA. Hesse wouldn't provide details about how Sprint will integrate the Virgin Mobile service into its overall prepaid strategy, but he said that the acquisition should help the company grow this part of the business.

"We see an opportunity to use the two brands (Boost Mobile and Virgin Mobile) very effectively," he said. "The Boost brand has traditionally been strong in its segments, and our unlimited offering is expanding the relevance of that service, which is why gross additions are up. Virgin has historically been very strong in the youth market. And we think that these two brands are better than one."

Some analysts question the profitability of prepaid services and inexpensive unlimited services like the one Boost offers. But Hesse said that the company is already making profits on the Boost unlimited service. He argued that it's easier and less expensive to acquire prepaid customers because they don't have to sign long-term contracts. Prepaid services also help mitigate the company's exposure to customers who rack up large bills and don't pay them, he said.

He added that the key to making prepaid more profitable is reducing the churn rate on this service. And he explained that the unlimited plan has helped do that.

"You get big profit swings on prepaid by improving churn," he said. "We see big changes here with improvements in network quality and the simplicity of our plans. We don't think we can get to post-paid churn levels. But we can get closer. And then we'd expect prepaid to be even more profitable even as we increase capacity on the network."

Getting a grip on the Palm Pre
Sprint also launched the much anticipated Palm Pre during the second quarter. Hesse said he was very pleased with the sales of the device, calling the launch of the device in early June the most successful the company has ever had. But he would not provide specific numbers about how many devices have been sold.

He did say that the early sales of the device were mostly to existing Sprint customers, who were looking to upgrade to new devices. Most of these customers were loyal Palm customers who had been waiting for a new and improved smartphone from Palm. But now, he said the company is starting to stock its non-Sprint retail channels, such as Radio Shack and Best Buy, with Palm Pres, which should help expand the customer base to attract people not yet using Sprint's service.

Hesse acknowledged that the introduction of the new iPhone 3GS on AT&T's network in mid-June caused a slight increase in customer churn, but he said the launch of the Palm Pre and the BlackBerry Tour helped stem the losses.

"When there is a new device launch, like the iPhone, which is a real hero device, we see a blip in increased churn," he said. "So I don't want to lead you to believe there was no impact with the iPhone 3GS. But I think we mitigated the impact with our new devices.

Currently, the Palm Pre is exclusive to Sprint. But that exclusivity is likely to run out at year's end. Verizon Wireless's chief operating officer Denny Strigl announced on the company's conference call earlier this week that Verizon Wireless plans to offer the phone starting in early 2010. Hesse would not comment specifically about when the exclusivity deal with Palm would expire, but he reiterated earlier assertions that the deal will run into 2010.

Despite Hesse's continued assertions that things are improving at Sprint, it appears that investors see the continued customer losses as a negative for the company. The company's stock was trading down more than 9 percent on Wednesday.