Sprint (NYSE:S) added 477,000 customers in the fourth quarter, defying analysts' expectations that it would lose subscribers. However, after posting its first quarterly net profit since 2007 in the third quarter, the company swung back into the red in the fourth quarter with a loss of $1.04 billion.
Click here for key slides from Sprint's fourth quarter earnings report.
Credit Suisse analysts Joseph Mastrogiovanni, Henrik Herbst and Michael Baresich wrote in a research note that the company's subscriber gains were much better than the 150,000 postpaid losses they had predicted. "The company further reported revenues and EBITDA ahead of our and consensus forecasts, partly due to better traction with equipment installment plans that appeared to help tablet sales," they wrote.
However, during the company's fourth-quarter earnings conference call, Sprint CEO Dan Hesse acknowledged that recent competitive actions by Sprint's rivals have affected the company. Specifically, he said that T-Mobile US' (NYSE:TMUS) offer to pay customers' early termination fees in order to get them to switch to T-Mobile is having "some impact" on Sprint. But Hesse said Sprint's recently introduced Framily family calling plan--which starts at $55 per month per line for unlimited talk, text and 1 GB of data and decreases in price as additional customers join the plan--is a differentiated offering that will set Sprint apart.
Beyond Sprint's earnings, the company acknowledged rumors that Sprint is interested in striking a deal with T-Mobile. "I don't comment on media speculation. But that being said, I've said consistently, for some time, that I believe that further consolidation in the U.S. wireless industry outside of the big two, outside of AT&T (NYSE:T) and Verizon (NYSE:VZ), because they're still large, would be healthy for the competitive dynamic of the industry," Hesse said, according to a Seeking Alpha transcript. "It would be better for the country, and better for consumers, and I still believe that that's very much the case."
According to a report this week from the Wall Street Journal, Sprint and SoftBank are reconsidering their plans to attempt a merger between T-Mobile and Sprint in the wake of significant regulatory opposition to the proposed transaction.
Here is a breakdown of Sprint's key quarterly metrics:
Network Vision/LTE: Sprint said it currently has more than 33,000 Network Vision multi-mode base station sites on air, up from the 26,000 it reported at the end of the third quarter. For the first time Sprint stated explicitly that its LTE coverage is now available to more than 200 million POPs, which had been its goal for the end of 2013. The company continues to expect that LTE coverage on its 1900 MHz spectrum will reach 250 million POPs by mid-year and that it will deploy LTE on its 800 MHz spectrum to 150 million POPs by year-end. Sprint expects its voice/3G network modernization deployment will be complete by mid-year.
Steve Elfman, president of network operations at Sprint, said that by mid-year the vast majority of Sprint's network footprint will be covered by 800 MHz voice service and HD Voice service. He also said that by mid-year Sprint will launch TD-LTE on 2,000 more legacy Clearwire cell sites using 2.5 GHz spectrum. He also said that by mid-year, Sprint expecst to begin overlaying its 2.5 GHz on our existing network as new 8T8R radios become available.
During the fourth quarter the company unveiled "Sprint Spark," its tri-band LTE service, which it says its capable of delivering peak speeds today of 50-60 Mbps using the company's 800 MHz, 1900 MHz and 2.5 GHz spectrum.
Sprint plans to deploy Sprint Spark in about 100 markets during the next three years. By the end of this year, 100 million Americans are expected to have Sprint Spark coverage. Today, Sprint Spark launched in Philadelphia and Baltimore and, with the recent launch in Kansas City, is currently available in 14 markets including New York, Los Angeles and Chicago. Sprint currently has 10 Spark-capable devices available, including the recently updated Samsung Galaxy S4, Samsung Galaxy Mega, HTC One max, LG G Flex and Netgear Zing mobile hotspot.
However, Sprint is still catching up to its rivals in LTE coverage. Verizon now covers 305 million POPs with LTE and has started deploying LTE on its AWS spectrum to augment capacity. AT&T covers nearly 280 million POPs with LTE and plans to cover 300 million by mid-2014. T-Mobile now covers 209 million POPs with LTE.
Subscribers: Sprint ended the year with 53.9 million "Sprint platform" subscribers, its highest level ever. The Sprint platform refers to the carrier's CDMA and LTE networks. The company added 58,000 postpaid subscribers, 322,000 prepaid subscribers and 302,000 wholesale and affiliate subscribers in the fourth quarter. However, during the fourth quarter, net additions for the Sprint platform included approximately 466,000 tablets, indicating weakness in the company's phone subscriber business.
Sprint had a total of 682,000 Sprint platform customer additions in the fourth quarter. However, due to 205,000 subscriber losses related to acquisitions, Sprint's total net subscriber additions for the fourth quarter came in at 477,000.
Hesse said on the call that in the fourth quarter Sprint was strong in smartphones and tablets but suffered a "significant decline" in feature phones.
"We have been cautious on Sprint because we thought operating trends were getting worse and would continue to struggle through most of 2014," New Street Research analyst Jonathan Chaplin wrote in a research note. "When we look at phone subscribers this quarter compared to total postpaid Sprint platform adds last quarter, it looks like trends are deteriorating, with gross adds weaker than expected and churn higher than expected. The tablet adds were a surprise and we aren't sure what to make of this result yet (all the carriers had strong tablet adds). Tablet ARPU is much lower than handsets; however, they don't carry a subsidy and very little variable cost, making them valuable subs. We will update our thesis once we have a better sense of whether the business is getting better or worse."
By comparison, Verizon Wireless (NYSE:VZ) added 1.7 million retail net connections in the fourth quarter, including 1.6 million net retail postpaid connections. AT&T reported a net increase in total wireless subscribers of 809,000 in the fourth quarter, including postpaid net adds of 566,000. T-Mobile has said it added 1.645 million customers in the fourth quarter, and of those, 869,000 were postpaid.
Smartphones: Sprint did not indicate how many Apple (NASDAQ:AAPL) iPhones it activated in the fourth quarter. Sprint sold 5.6 million smartphones in the fourth quarter, down from 6.1 million in the year-ago quarter. However, Sprint said smartphones represented 95 percent of postpaid handset sales in the quarter and 66 percent of prepaid handset sales.
Churn: Sprint's retail postpaid churn was 2.15 percent, up from 2.02 percent in the year-ago period. Sprint said Sprint platform postpaid churn was 2.07 percent, up from 1.89 percent in the year-ago quarter. Sprint platform prepaid churn was 3.01 percent, flat from the year-ago period.
Hesse said Sprint's churn is higher because Sprint is still ripping out and replacing its 3G network equipment as part of its Network Vision upgrade program. Hesse said this "manifests itself in higher voice service drops and blocked calls," which contribute significantly to churn. He said this is "particularly painful to me, as we've made the customer experience our top priority."
However, he said this will be a temporary phenomenon. He said that, in markets that are more than 70 percent completed, churn has returned to prior levels. And he said that in markets that are 100 percent complete, churn is lower than before the upgrade began.
Still, Sprint expects that it will lose postpaid customers in the first half of 2014 before returning to positive postpaid subscriber growth in the second half of the year as the network upgrade gets completed.
ARPU: Sprint posted Sprint platform postpaid average revenue per user of $64.11, up from $63.04 in the year-ago period. Splint platform prepaid APRU was $26.78 in the quarter, up from $25.92 in the year-ago period.
Financials: Sprint's net operating revenue was $9.14 billion in the quarter, up from $9 billion in the year-ago period. Analysts had estimated Sprint would have revenue in the quarter of $8.99 billion on average, according to data compiled by Bloomberg. Sprint said quarterly adjusted EBITDA of $1.15 billion improved nearly 40 percent year-over-year. Sprint said the improvement came from growth in Sprint platform service revenue, network savings resulting from the Nextel iDEN network shutdown and lower net subsidy expenses. Those were partially offset by the loss of Nextel platform revenue and the consolidation of Clearwire's results.
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