CDMA growth overshadows iDEN drag for Sprint Nextel during Q3: Stock price sinks in early trading

Sprint Nextel Corp. (S) continued to turn around its flagging customer growth results during the third quarter, though at a tough financial cost.
The nation’s No. 3 operator said it added 644,000 net total customers to its network during the third quarter, which was a sharp increase from the 545,000 customers it lost during the same quarter in 2009. The carrier noted this year’s growth was boosted by customers signing up for service on its CDMA-based network that overshadowed continued losses from its iDEN-based network.
Those results were well short of the 2.6 million net connections posted by AT&T Mobility (T) and the 1.25 million net connections reported by Verizon Wireless (VZ).
Sprint Nextel said that a net gain of 276,000 direct postpaid CDMA customers during the quarter was offset by the loss of 78,000 customers using its hybrid CDMA/iDEN PowerSource service and the loss of 383,000 postpaid iDEN customers. The result was a loss of 107,000 direct postpaid customers during the quarter, which dragged its direct postpaid customer base down to 33.1 million subscribers. The result was an improvement compared with the 801,000 customers the carrier lost during the third quarter of 2009.
The postpaid losses came despite a year-over-year improvement in churn from 2.17% to 1.93%.
The iDEN struggles continued in its prepaid operations as well where the carrier said it lost 700,000 customers from its Boost Mobile iDEN service that was offset by a net gain of 1.2 million prepaid customers to its CDMA network that resulted in a total net gain of 471,000 prepaid customers during the quarter. The results were down year-over-year from the 666,000 prepaid customers the carrier added during the third quarter of 2009, but an increase sequentially from the 173,000 customers it added during the second quarter of this year.
Similar to its postpaid results, the carrier’s prepaid churn levels dipped from 6.65% during the third quarter of 2009 to 5.32% this year, which the carrier attributed to the inclusion of the CDMA-based Virgin Mobile USA and Assurance Wireless service results following its acquisition of the brands earlier this year that offset higher churn from its iDEN-heavy Boost Mobile service.
Sprint Nextel’s CEO Dan Hesse noted that the carrier’s iDEN network, while showing improved network quality, was being impacted by more attractive device selections from its CDMA offering that are luring customers away from the iDEN network. Hesse added that the carrier was also focusing virtually all of its marketing efforts on its CDMA-based network, which provides a better return on the investment than attracting new customers to iDEN services, but that churn levels for its iDEN network were improving and nearing those of its CDMA service.
Rounding out its Sprint Nextel also noted that its wholesale and affiliate partners added 280,000 net customers during the quarter compared with a loss of 410,000 during the third quarter of 2009.
While customer growth was showing positive momentum, average revenue per user results slipped slightly as postpaid ARPU dropped year-over-year from $56 to $55, while prepaid numbers dipped from $35 to $28. The prepaid slide was attributed to lower monthly revenue from Virgin Mobile USA and Assurance Wireless customers.
The mix between stronger customer growth and lower ARPU flattened out the carrier’s total revenues that inched up just slightly year-over-year from $8.042 billion during the third quarter of 2009 to $8.152 billion this year. The same was true for expenses with increased device subsidies pushing up total operating expenses from $8.296 billion in 2009 to $8.356 billion this year. Sprint Nextel noted that smart phones accounted for 60% of gross additions and upgrades during the quarter and that 45% of its customer base were using smart phones.
Sprint Nextel’s bottom line was further hampered by $53 million in income tax expense during the quarter that helped push total net losses up $478 million during the third quarter of 2009, a loss of 17 cents per share, to $911 million in 2010, or a loss of 30 cents per share.
Investors appeared to panic on the news sending the carrier’s stock down more than 8% in early trading.
Looking ahead, investors are becoming increasingly interested in the Sprint Nextel’s plans to modernize its network. The carrier has said it was in the process of evaluating proposals from infrastructure providers for a plan to consolidate its current two-network operations (CDMA and iDEN) into a single platform that can save operational costs and could result in the decommissioning of up to 20,000 cell sites.
Hesse noted during the third quarter conference call that the carrier was still mulling over its options, which the carrier had previously said it would make a decision on before the end of the year. Once decided on, Hesse said he did not expect financial benefits from the “three to four year plan” to take effect until at least 2012.
The carrier did note that it was currently trialing CDMA technology using some of the 800 MHz spectrum that the carrier is currently in the process of unifying through an extensive rebanding plan that will leave the carrier with 14 megahertz of contiguous spectrum in the 800 MHz band. Those tests are for CDMA voice services that would provide better in-building coverage, with Sprint Nextel saying it could deploy one CDMA voice channel in that spectrum band and still support its iDEN services.
Hesse would not comment as to whether the carrier’s iDEN network, which continues to support more than 11 million customers, continued to have a long-term future at the company. In addition, the carrier downplayed possible back-up plans related to its network agreement with Clearwire Corp. beyond that it did have a plan in place, but that it was still focused on continuing its WiMAX relationship with Clearwire.