Sprint Nextel’s second quarter results show that the nation’s No. 3 carrier could be laying the foundation for a payoff from its controversial and expensive plans to carry Apple’s iconic iPhone device.
Analysts noted that the carrier posted a number of robust operating metrics during the quarter, many of which the investment community tied to Sprint Nextel’s launch of the iPhone late last year. Those metrics included growing average revenue per user, falling postpaid churn and the carrier’s apparent ability to steal postpaid customers from its rivals.
That enthusiasm resulted in a surge in Sprint Nextel’s stock price (S), which was up more than 14% in early Thursday trading.
Analysts noted that Sprint Nextel sold approximately 1.5 million iPhone devices during the quarter, which was above forecasts. While those sales pale in comparison to the 3.7 million sold by AT&T Mobility and 2.7 million sold by Verizon Wireless during the quarter, the carrier posted a gain in market share for the device during the quarter and sold a greater percentage of the devices to new customers compared with rivals.
However, those improvements also came with a downside as the operator posted deeper losses that even lower than expected capital expenditures could not help to cover up.
Net losses for its wireless operations increased from $27 million during the second quarter of 2011 to $681 million this year, despite an 8% increase in total wireless revenues. Increased costs associated with subsidizing iPhone sales from $1.1 billion in 2011 before it began offering the device to $1.5 billion this year was noted as impacting overall expenses.
Sprint Nextel also seemed to stunt capital expenditures during the first half of the year, perhaps in an attempt to offset expected increases in device subsidies. The carrier said it spent $1.7 billion in capex during the first two quarters, with full-year planning of $6 billion in capex. This would indicate that the carrier will be significantly ramping up capital expenditures during the second half of the year tied to its Network Vision program and rollout of LTE services. This move could spell good news for infrastructure and tower vendors over the coming quarters.
For the quarter, Sprint Nextel reported a loss of 105,000 customers through direct retail channels, with most of that loss attributed to its iDEN-based operations that the carrier has begun to phase out. On the postpaid side, Sprint Nextel said it added 442,000 customers through its CDMA-based operations that were offset by the loss of 688,000 iDEN customers and resulted in a net loss of 246,000 postpaid customers. That was more than double the 101,000 postpaid customers the carrier lost during the second quarter of 2011.
Prepaid results were not as lopsided as the carrier added 451,000 no-contract customers through its CDMA operations while its iDEN prepaid services, which are made up entirely of its Boost Mobile services, lost 310,000 customers. In total, prepaid net additions came in at 141,000 customers for the quarter, which was a dramatic drop from the 674,000 net prepaid customers added during the second quarter of 2011.
Sprint Nextel’s wholesale and affiliate operations added 388,000 net customers to the network, which was down from the 519,000 customers added through these channels last year.
Overall, Sprint Nextel’s customer growth plunged from nearly 1.1 million net additions last year to just 283,000 net customer additions to its network this year. The carrier ended the first half of the year with nearly 56.4 million customers across its networks.
The drop was not unexpected as the carrier has ramped efforts to shutter its iDEN operations, which resulted in a significant increase in losses across that platform. The carrier did note that it managed to retain 60% of churning iDEN customers to its CDMA operations during the second quarter compared with 46% during the first quarter of the year. The carrier did warn that it expects the recapture rate to fall back to around 40% for the current quarter.
For comparison, AT&T Mobility managed to add 1.266 million net connections during the second quarter, while Verizon Wireless posted just under 1.2 million direct customer additions. This was a sequential turn around for Sprint Nextel, which managed to outgrow its larger rivals during the first quarter of the year.
Customer churn during the quarter was a mixed bag as postpaid churn inched up year-over-year from 1.75% to 1.79%, while prepaid churn improved from 4.14% in 2011 to 3.53% this year. Analysts were somewhat surprised by the postpaid churn results as many expected the carrier to post around 2% churn in line with results from the first quarter of the year. Many singled out the iPhone as a reason for the lower than expected churn result.
Average revenue per user witnessed a jolt as postpaid ARPU surged more than $4 to $60.88 during the second quarter, which the carrier claimed was the largest year-over-year increase in company history. The carrier attributed the increase to mandatory smartphone charges introduced early last year as well as adjustments to its discount policy on rate plans.
Prepaid ARPU dipped nearly $1 year-over-year to $26.59, which was attributed to growth in its federally subsidized Assurance Wireless program that provides wireless phones and services to fiscally stressed customers.
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