Sprint scores 22K postpaid phone net adds but notches $554M net loss in mixed Q1

It turns out T-Mobile US wasn't the only major U.S. wireless carrier to see positive growth in net postpaid phone customers in the latest quarter after all.

Sprint said it scored 22,000 postpaid phone net additions in the quarter, marking its third consecutive quarter of positive growth. It added 1.2 million postpaid net additions on the fiscal year, 438,000 of which were phones, and its $310 million in operating income for the fiscal year was positive for the first time in nine years.

Sprint is the last of the four major U.S. network operators to post its earnings for the latest quarter, and it joins T-Mobile in seeing positive net postpaid phone additions. Verizon lost 8,000 postpaid phone subscribers during the quarter, and AT&T reported a net loss of 215,000 postpaid phone users during the period.

The subscriber adds can largely be attributed to aggressive Sprint promotions such as its offer to cut the bills in half for customers who switch from Verizon, AT&T or T-Mobile. The campaign was launched last November and then extended into February due to strong customer demand.

Perhaps predictably, though, Sprint's recent growth has come at a cost. Net operating revenue fell to $8.07 billion during the quarter, down 2.5 percent from the prior year. And its net loss widened to $554 million, more than doubling the $224 million Sprint recorded during the same period in 2015.

"The strategy worked to reinvigorate growth," MoffettNathanson analysts in a research note discussing Sprint's earnings. "After all, in a commodity industry, if you offer a fifty percent discount to the competition, there's something wrong if you don't add subscribers. But it has utterly wrecked ARPU and (real) EBITDA.

"Now, after six months of the half-off therapy, the efficacy of Sprint's medicine is once again waning; yes, they reported positive phone and total postpaid net adds… but just barely. And prepaid results were poor."

There were bright spots in Sprint's earnings, however: Adjusted EBITDA was $2.16 billion, compared with the $2.02 billion average of estimates compiled by Bloomberg. And while the 56,000 overall monthly subscribers Sprint added fell well short of the 197,000 average of six analysts surveyed by Bloomberg predicted, overall sales were $8.1 billion, beating estimates of $8 billion

Investors viewed the earnings relatively positively, sending shares up roughly 5 percent by mid-morning training.

T-Mobile passed Sprint to become the nation's third-largest carrier last year, and last week it said it added a total of 2.2 million customers during the latest quarter, including 877,000 branded postpaid net adds. When asked why Sprint wasn't able to close the gap with its rival despite its aggressive promotions, Sprint CEO Marcelo Claure said on a conference call with reporters that the carrier continues to make progress.

"You've got to figure out where you're coming from," Claure said. "T-Mobile was adding 1 million (customers) last year, we were losing 1.5 million, so the gap was so large. When we started this journey we were last -- trailing AT&T, trailing Verizon, trailing T-Mobile -- so we are making improvements."

Claure said Sprint will take a page from T-Mobile's playbook by opening 1,000 new retail outlets this year. T-Mobile continues to build out its retail footprint to fully leverage the network buildout it continues to execute, particularly in suburban and rural areas.

Here's a closer look at some key quarterly metrics from Sprint:

Subscribers: Some analysts were surprised Sprint saw any gains in postpaid net phone adds, but the carrier's overall subscriber growth disappointed. And its prepaid losses of 264,000 were much worse than the 181,000 analysts expected, leading to an overall loss of 208,000 branded net additions, well short of the 39,000 overall adds expected.

Financials: Sprint's service revenue of $6.15 billion fell short of consensus estimates of $6.19 billion, but EBITDA came in at $2.13 billion, surpassing estimates of $2 billion. Postpaid ARPU was $51.68, down 9.2 percent year over year, and handset ARPU of $59.45 beat New Street Research's expectation of $59 but was down 85 cents sequentially. Adjusted EBITDA grew 23.8 percent year over year to $2.16 billion, "helped by the add-back of network write-downs and lease exit costs," according to UBS analysts.

Network build-out: Sprint has deployed LTE Plus, its brand for carrier aggregation and beamforming technologies, in 204 markets across the U.S., up from 150 markets in January. The carrier has begun selling devices that support three-carrier aggregation and it plans to roll out the technology on its network early next year. But Sprint also said it is reducing capex by 36 percent this year, although Claure maintained it is "not delaying any spending" on its network. MoffettNathanson analysts seemed to disagree, writing "This is largely a deferral of capital spending from 2016 to 2017, again, a move towards sustainability rather than growth."

5G: Sprint is helping to develop the global standards for 5G, Claure said, and plans to partner with Nokia and Ericsson to demonstrate millimeter-band radios during next month's Copa America soccer tournament.

Summary: Sprint is making solid progress on several fronts: Its network continues to improve, it is effectively cutting costs across the board, and its promotion-heavy strategy helped it win postpaid phone customers during a particularly brutal quarter. But its underlying financials are still cause for concern. "Based on current trends and ARPU trajectory, along with a capex cut, the business doesn't seem to be on track to improve," New Street Research analysts wrote. "Recent financing transactions and cost-cutting won't help fix their underlying ARPU and subscriber trajectory problems (they only ensure Sprint stays in business through 2016). Something dramatic needs to happen for Sprint's business to be viable."

For more:
- see this Sprint press release
- read this Bloomberg report

Special Report: Wireless in the first quarter of 2016

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