Sprint adds postpaid phone customers for first time in 2 years in Q3

Sprint (NYSE: S) reported that it gained postpaid handset customers on the Sprint network in the third quarter, the first time it had done so in a full quarter in more than two years. The company is on the verge of cutting billions of dollars in expenses in a bid to get back to profitability, and Sprint CEO Marcelo Claure and his leadership team think they are at a turning point in the company's turnaround.

As it has worked to improve its network, Sprint has focused on attracting and retaining more postpaid phone customers by expanding its distribution through a deal with RadioShack and launching its Direct 2 You program, in which employees come to customers to set up their phones. Sprint has also launched its "iPhone Forever" program, which allows customers to always be eligible to upgrade to the latest iPhone.

Yet steep challenges remain for Sprint, which plans to lay off employees as part of an effort to cut as much as $2.5 billion in costs out of the business over the next few months. Additionally, it plans to set up leasing companies with parent SoftBank to purchase handsets and network equipment, but those programs are not yet finalized. And Sprint still needs to carry out its plan to densify its network by deploying thousands of new macro cell sites and tens of thousands of small cells.  

Claure said on the company's earnings conference call that Sprint continues "to work with SoftBank and other recognized companies to set up a lease company to monetize device leases by our customers. We have agreed upon most of the commercial terms. We're currently finalizing the documentation and we expect to close first tranche in the next few weeks." Claure and Sprint CFO Tarek Robbiati said Sprint will provide more details on the leasing venture for handsets in the next few weeks. However, the leasing company will be off Sprint's balance sheet, and Sprint will be a servicing agent for leases sold to the company, with ongoing payments that will be included in Sprint's EBITDA.

After suffering subscriber losses, especially postpaid losses, for so long, Sprint has some cause for optimism. The company said that based on October results, it has now seen positive postpaid phone net additions for six consecutive months, a streak not seen in nearly three years. However, the mark of hitting postpaid handset subscriber additions for the first time in more than two years excludes Nextel/iDEN subscriber losses. (Sprint finally shut down the iDEN network in June 2013 but had significant iDEN subscriber losses before then).  

"This quarter marks a very important milestone in our turnaround effort at Sprint," Claure said on the company's earnings conference call. "We are progressing in our plan to return Sprint to net income profitability, positive cash flow, subscriber growth and network parity or superiority. I'm very excited about the momentum that Sprint has with its wireless customers all over America."

Some analysts were not too optimistic. "Subscriber trends improved; but they weren't great," New Street Research analysts Jonathan Chaplin said in a brief research note. "Phone adds turned positive for the first time in two years, but excluding transitions they missed consensus." 

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

Subscribers: Sprint posted total net customer additions of 1.1 million compared to 590,000 in the prior year quarter. In total, the company added 553,000 postpaid customers in the period, Sprint's fiscal second quarter, compared to net losses of 272,000 in the year-ago quarter.

During the quarter 199,000 prepaid customers with consistent payment history migrated to Sprint's postpaid service, with 175,000 of these migrations now included as postpaid customers under the respective Boost and Virgin brands. Excluding total migrations from prepaid, postpaid net additions would have been 354,000.

Sprint added 237,000 postpaid phone customers in the period, compared to net losses of 500,000 in the prior year quarter, an improvement of 737,000 year-over-year. Excluding migrations from prepaid, postpaid phone net additions would have been 38,000, and improved by 538,000 year-over-year.

In comparison, in the third quarter T-Mobile US (NYSE:TMUS) added 843,000 postpaid phone customers, by far the most in the industry, while Verizon (NYSE: VZ) added 430,000 such customers and AT&T (NYSE: T) lost 545,000, which it said were mostly feature phone customers.

Sprint's results were better than some analysts had expected. Analysts at Wells Fargo, for example, had forecasted Sprint to report 70,000 total postpaid net adds, including 10,000 postpaid phone net adds and 60,000 postpaid additions from tablets.

In a weak spot, Sprint reported that it lost 363,000 prepaid customers in the quarter, compared to net additions of 35,000 in the year-ago period. Excluding migrations to postpaid, prepaid net losses would have been 164,000. Sprint had wholesale net additions of 866,000 compared to 827,000 in the year-ago period.

ARPU: The carrier said pure average revenue per user on the Sprint platform was $54.02, down from $60.58 from a year ago. However, when adding in equipment installment plan and monthly device lease billings, average billings per user was $70.64 for the quarter, up 2 percent year-over-year from $69.02, and up 1 percent sequentially. The increases were primarily related to higher installment billings and lease revenues associated with device financing, partially offset by a shift to lower priced rate plans offered in conjunction with device financing options.

Financials: Sprint reported a net loss of $585 million, or 15 cents per share, on revenue of $7.98 billion, for the quarter, weaker figures than analysts had expected. According to analysts polled by Thomson Reuters, Sprint was expected to report a loss of about 8 cents a share and $8.1 billion in revenue for its fiscal second quarter.

Sprint's total operating revenue was down 6 percent year-over-year, as customers shifted to cheaper rate plans associated with device financing options and postpaid phone customer losses from prior periods drove lower wireless service revenues. Wireless service revenues plus installment plan billings and lease revenue of $7.1 billion increased slightly from the prior year period.

The company burned through $100 million in cash for the quarter, compared to burning through $75 million in the year-ago quarter and $2.2 billion in the second quarter. Normalizing for the $400 million received from the sale of receivables in the quarter and a $500 million repayment under the facility in the prior quarter, free cash flow would have been negative $500 million in the current quarter and negative $1.7 billion in the second quarter, respectively.

Claure said that the company is confident in its plan to achieve a sustainable reduction of $2 billion or more in run-rate in operating expenses. The cuts will come from every area of the business, "leaving no stone unturned," Claure said, as Sprint works on improving procurement and operational efficiency.

"Ultimately, we must find a way to grow and optimize the business at the same time," Claure added. "I understand that some people will be skeptical, believing that those are two mutually exclusive outcomes. Nevertheless, we're extremely confident that we can execute on both at the same time, with the guiding principle that changes we make in the operating model must be executed in a way that minimizes any disruption to the sales momentum we're achieving or the customer experience."

Robbiati said that Sprint expects to book between $1 billion and $1.2 billion in one-time costs as part of its cut to operating expenses for the remainder of fiscal year 2015 and over fiscal year 2016.

"The call was not well received obviously. Unfortunately we were hopeful for more answers regarding leasing company," Wells Fargo analyst Jennifer Fritzsche said in a research note. "While Robbiati has indicated [free cash flow] will improve and CY2015 will be peak year of [free cash flow] losses -- investors need to know 'meat' of details here before they can have confidence around this -- which is understandable. That said, we still believe there were bright spots in the quarter -- namely around the significant churn improvement being seen."

Churn: Sprint platform churn was once again at a record low of 1.54 percent, compared to 2.18 percent for the year-ago period and 1.56 percent in the second quarter. The 64 basis point year-over-year improvement was primarily driven by improved quality of recently acquired customers and improved network experience, Sprint said, adding that sequentially, those same factors more than offset typical seasonal pressure.

For more:
- see this release
- see this Sprint presentation (PDF)

Special Report: Wireless in the third quarter of 2015

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