Sprint notches 1.8M iPhone activations in Q4, but margins take hit

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Sprint Nextel (NYSE:S) posted a wider net loss for the fourth quarter, but gained the most net subscribers in a quarter since 2005 thanks in large part to the addition of Apple's (NASDAQ:AAPL) iPhone to its lineup. However, like other carriers, selling the iPhone came with a cost--Sprint's margins took a hit as a result of higher device subsidy costs.

Sprint reported a net loss of $1.3 billion in the quarter, wider than its loss of $929 million in the fourth quarter of 2010. During the company's fourth-quarter earnings conference call, Sprint CEO Dan Hesse said that "although we're far from finished, our progress has been very significant." He said Sprint will enter the second phase of its turnaround this year, which involves "investment for future growth" from the iPhone and its Network Vision network modernization plan.

Interestingly, in its results Sprint started referring to the "Sprint platform" and the "Nextel platform" for the first time. The Nextel platform refers to Sprint's iDEN network, which Sprint will start decommissioning this year, while the Sprint platform refers to the carrier's core ongoing business, which includes CDMA, WiMAX, LTE and other network technologies.

Here is a breakdown of Sprint's key quarterly metrics:

iPhone: Sprint added 1.8 million iPhones in the quarter, and said that around 40 percent of those, or 720,000, were new customers. Sprint executives had previously said they expected at least 1 million iPhone sales in the quarter. Sprint has banked on keeping its unlimited smartphone data plans as a way to differentiate its iPhone offerings from those of Verizon Wireless (NYSE:VZ) and AT&T Mobility (NYSE:T). AT&T added 7.6 million iPhones in the fourth quarter and Verizon added 4.3 million. Sprint did not provide guidance for future iPhone sales.

Like both Verizon and AT&T, Sprint's margins were pulled down in the quarter due in part to the subsidies it paid on the iPhone. Sprint's adjusted OIBDA margin fell to 10.8 percent, down from 18.2 percent in the third quarter. (By comparison, Verizon's wireless service margin was 42.2 percent in the fourth quarter, down from 47.8 percent in the third quarter, and AT&T's wireless service margin fell to 27.8 percent in the fourth quarter, down from 43.7 percent in the third quarter.) Sprint CFO Joe Euteneuer said that although Sprint needs to pay the up-front cost to Apple to carry the iPhone (it has a $15.5 billion, 4-year contract with Apple), iPhone customers will bring long-term benefits to Sprint through increased revenues. Hesse said that Sprint is not worried about its iPhone sales commitments to Apple. He also that Sprint is seeing lower data usage from iPhone customers compared with its Android smartphone customers.

Network Vision/LTE: Sprint noted that in the fourth quarter it completed field integration testing and launched its first multi-mode base station as part of Network Vision, which Sprint has said will improve 3G network performance, such as voice quality, call drops and blocks and improved data speeds. The base stations will allow Sprint to refarm its 800 MHz spectrum, currently used for iDEN service, for advanced CDMA voice services and eventually LTE.

Steve Elfman, Sprint's president of network operations and wholesale, said on the earnings call that Network Vision will allow Sprint to reduce the total number of its cell sites by 44 percent, from 68,000 down to around 38,000. He also said that 9,600 iDEN cell sites will be decommissioned by the end of 2012. The company expects to bring around 12,000 sites on air by the end of 2012 and to complete the majority of its Network Vision rollout in 2013. Sprint also plans to launch LTE service in 10 markets by mid-year on its 1900 MHz G Block spectrum. In addition to Atlanta, Dallas, Houston, San Antonio and Atlanta, Sprint announced that Baltimore and Kansas City will be among its initial LTE markets.

Subscribers: Sprint added 1.6 million net wireless customers in the fourth quarter, including net additions of 668,000 retail subscribers and net additions of 954,000 wholesale and affiliate subscribers as a result of growth in MVNOs reselling prepaid services. The carrier added around 161,000 net postpaid subscribers during the quarter, compared with a gain of 58,000 postpaid customers in the fourth quarter of 2010. Further, Sprint added 507,000 net prepaid subscribers during the fourth quarter, which includes net additions of 899,000 prepaid Sprint platform customers, offset by losses of 392,000 net prepaid Nextel platform customers. Sprint added 5 million net customers in 2011, and ended the fourth quarter with 55 million total subscribers.

Churn: The carrier's total retail postpaid churn was 1.98 percent, up from 1.86 percent in the fourth quarter of 2010. Sprint's retail prepaid churn was 3.68 percent, down from 4.93 percent in the year-ago quarter. Sprint said quarterly postpaid churn increased year-over-year and sequentially due to higher involuntary deactivations, which occur when Sprint disconnects a customer due to lack of payment or violations of terms and conditions. The carrier said that the increase is temporary, and the majority of the increase was associated with pricing actions taken primarily through indirect channels. Sprint also said it tightened its credit standards during the third and fourth quarters to stem the impact from the retail activities that hurt Sprint. RadioShack blamed the actions on its sluggish Sprint wireless sales.

ARPU: Sprint's total wireless average revenue per user for postpaid customers increased to $58.59 from $55.26 in the year-ago period, the largest year-over-year postpaid ARPU increase in company history. However, the company's total retail prepaid ARPU fell to $26.62 from $27.95 in the year-ago quarter.

Financials: Sprint's operating revenues climbed 5 percent in the quarter to $8.72 billion. Sprint reported wireless retail service revenue of $6.9 billion, up more than 7 percent compared to the fourth quarter of 2010 and more than 1 percent compared to the third quarter of 2011.

For more:
- see this release
- see this Reuters article
- see this CNN Money article

Special Report: Wireless in the fourth quarter of 2011

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