Sprint: Glimmers of progress

For several years now, Sprint Nextel's (S) performance has been blighted by massive defections by its wireless subscribers. In 2008, for example, the U.S.'s third-largest wireless carrier lost 4.5 million users to rivals AT&T (T), T-Mobile (DT), and others.

But Sprint's first-quarter financial results, reported on May 4, included a sliver of good news: The company is still losing subscribers, but at a slower rate than in the past. Sprint lost 182,000 subscribers in the first quarter, compared with 1.27 million in the fourth quarter and nearly 1.1 million users in the first quarter of 2008.

Sprint also reported a loss of $594 million for the first quarter of this year, a bit wider than the $505 million loss a year ago. Meanwhile, revenues dropped 12% from the year-earlier quarter, to $8.2 billion, which was below Wall Street expectations.

Sprint CEO Dan Hesse told investors that the company is making progress in holding onto customers. "Sprint produced its best sequential quarter in Sprint Nextel's history in both gross adds and net adds," he said during a conference call. The lower subscriber losses were the result of growing demand for Amazon's (AMZN) Kindle e-reader, which uses Sprint's network to download e-books off the Web, and good traction at division Boost, which sells prepaid wireless service plans.

Nagging postpaid subscriber losses

But it's worth parsing the subscriber data. While Sprint lost only 182,000 customers overall in the quarter, it had much heavier losses of customers who sign up for monthly wireless service plans, called "postpaid" customers in the industry, who tend to generate higher revenues per subscriber than prepaid customers. In fact, the company's postpaid customer losses accelerated to 1.25 million in the quarter, up from 1.1 million in the fourth quarter of 2008 and the same total in the year-ago quarter.

In addition, Sprint's customer churn was actually up, from 2.16% in the fourth quarter to 2.25% in the first quarter of 2009. "Prepaid growth was a little bit better than expected, but postpaid was worse than expected," says Christopher King, an analyst at Stifel, Nicolaus & Co.. "It's hard to see them making much progress."

The introduction of the much anticipated Palm Pre smartphone in the second quarter could slow the postpaid defections. King, for one, is modeling for Sprint's churn to drop to 2.1% in the third quarter because of the introduction of the Pre. And on May 1, UBS (UBS) analyst Maynard Um released a report speculating that the device's sales could come in close to those of the Apple (AAPL) iPhone, a device that has driven massive waves of customers to provider AT&T. Um expects Palm (PALM) to ship 865,000 Pre units in the quarter ended in August. But that estimate may prove aggressive. After all, the Pre's launch will come right before the launch of a new iPhone, which is sure to attract some buyers who might have otherwise opted for the Pre.

Much of the Pre's success will hinge on Sprint's ability to successfully market the device. Several recent Sprint ad campaigns have proven to be duds.

"The Pre could be the first shot [Sprint] really has of having a sudden surge of interest in Sprint," says Michael Mahoney, managing director at Falcon Point Capital.

"[Marketed well], Pre could potentially make Sprint into a cool new brand."

Danger of lower revenue per user

But even then, gaining postpaid subscribers will be more difficult now that the wireless market has reached saturation. In the first quarter, 80% of net subscribers added opted for prepaid service plans, compared with 50% a year ago, estimates Craig Moffett, senior analyst at Sanford C. Bernstein. "Postpaid growth is now arguably 'over' "—not just for Sprint but for the entire wireless industry, he wrote in a May 4 report.

The increased proportion of prepaid consumers could eventually start pulling down Sprint's financial metrics. Because the prepaid division's service plans are lower priced than postpaid offerings from Sprint, "they are going to see declining average revenue per user," says Charles Golvin, a principal analyst at consultant Forrester Research (FORR). In the first quarter, though, Sprint's average revenue per user held constant, at $56 a month. Prepaid average revenues per user actually rose slightly, from $30 in the fourth quarter to $31 in the first quarter of 2009.

One other concern has to do with Sprint's cutbacks in spending on its wireless network. The company spent only $200 million on wireless capital expenditures in the first quarter, compared with $900 million in the year-ago period. Sprint explains the dramatic drop by lower network capacity needs after losing many of its subscribers. But analysts are concerned that "they are really cutting back on basic network and maintenance," says Mahoney. On May 4, The Wall Street Journal (NWS) reported that Sprint is in talks for Ericsson (ERIC) to take over the management of its wireless network. Sprint declined to comment on the report.

Kharif is a senior writer for BusinessWeek.com in Portland, Ore.