Sprint’s Lifeline issue hurts wireless service revenue

Sprint on Monday reported losing nearly 300,000 phone subscribers in the latest quarter alongside profit losses and revenue declines, and felt a negative impact from its issues with the government’s Lifeline program.

Like last quarter, Sprint did not hold a quarterly earnings conference while the fate of its pending merger with T-Mobile remains undecided, but released a message from management expressing optimism that the deal will close in early 2020.  

"I am proud of the resiliency of the Sprint team as they work to deliver results in a challenging environment," said Sprint CEO Michel Combes in a statement. "However, I remain convinced that merging with T-Mobile and building one of the world's most advanced 5G networks is the best outcome for all consumers, employees, and shareholders."    

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Overall, for its fiscal year 2019 second-quarter, Sprint lost 396,000 net wireless connections in the period, including wholesale customers, compared to a loss of 20,000 in the same period last year. Just looking at retail phone subscriber declines, Sprint lost 91,000 postpaid phone net and 207,000 prepaid phone customers, for a combined loss 298,000.

Postpaid phone churn for the nation’s fourth-largest carrier climbed higher in the quarter, hitting 1.91%, compared to 1.78% in the year-ago period, and Sprint expects that figure to worsen next quarter due to seasonality.

“That would put churn over 2%, something we haven’t seen in years for any of the majors,” wrote MoffettNathanson analysts, led by Craig Moffett, in a Monday report to investors.

In addition to losing more subscribers, Sprint is also generating less revenue from the ones it has, with postpaid average revenue per user (ARPU) dropping 4% year over year to $42.30. The carrier pointed to a higher mix of data device connections, which generally bring in less than high-value phone subscribers.  

Sprint was also affected by revelations in September that it had falsely collected “tens of millions” in subsidies for subscribers the carrier incorrectly claimed under the government’s Lifeline program, which is meant to help provide phone and internet service for low-income Americans.

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Sprint’s total wireless revenue decreased $453 million year over year to $5 billion, which it said was negatively impacted by estimated reimbursements to the U.S. government for collecting Lifeline subsidy payments it wasn’t entitled to –  but did not disclose specific amounts.

Sprint claimed and received subsidies for 885,000 Lifeline subscribers who were inactive and did not meet the program’s usage requirements ­– a figure that, according to the FCC, represents 10% of the entire Lifeline program’s subscriber base and 30% of Sprint’s Lifeline subscribers.

Sprint had said once the carrier discovered the error it immediately and proactively raised the issue with the FCC and appropriate state regulators. In earnings materials, Sprint reiterated that it’s “committed to reimbursing federal and state governments for any subsidy payments that were collected incorrectly.”

The FCC is investigating the Lifeline issue and aside from reductions in revenue, Sprint still might face fines, which could total in “the low billions of dollars,” according to a Sunday research note from analysts at New Street Research.

Sprint said that excluding impacts from Lifeline, as well a new accounting standard, “total wireless service revenue was relatively stable sequentially year over year.”

New Street analysts led by Blair Levin wrote Sunday that while Sprint’s Lifeline problems aren’t relevant to competition issues that will be the main focus of the upcoming merger trial, it could result in some adjustments to the deal structure between T-Mobile and Sprint, in order to incorporate the outcome of the FCC’s enforcement action.

The trial, brought on by a coalition of more than a dozen state attorneys general, including those representing New York and California, is slated to start Dec. 9. Sprint’s continued weak performance won’t be the focus though, according to MoffettNathanson, instead the court case will really be about remedies that were part of the settlement reached with the U.S. Department of Justice. Specifically, eyes will be on Dish Network and its viability as a fourth competitor, rather than Sprint’s risk as a standalone entity.

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“The question facing Judge Marrero in the state AG case is whether Dish Network is a credible new competitor,” wrote Moffett. “If the capital requirements of competing in the wireless market lead one to conclude that Sprint is over-levered and has too weak a network to compete, how will Dish Network, which has even higher leverage, less spectrum, and no network at all, and has a core business that is shrinking by 10% per year or worse, be credibly viewed as a viable substitute?”

T-Mobile reported its own third-quarter results last week and CEO John Legere remained confident about the merger’s prospects. T-Mobile's chief executive said the company continues to converse with the states, and discussions have centered on 5G buildouts, pricing, and Dish as a competitive entrant.

“We feel very good about the conversations and where they're headed, and we feel very good and confident either in the process of a settlement or even going to trial,” Legere said on company’s earnings call.

T-Mobile has promised to announce its first “un-carrier” move for the New T-Mobile later this week on Nov. 7.

In its earning results, Sprint also reported a net loss of $274 million, compared to net income of $196 million the same quarter of 2018 and adjusted EBITDA of $2.6 billion.