Roaming Expenses Up, Capex Down, Sprint Reports
From Sprint Nextel’s perspective the biggest news for Q4 was AT&T’s decision to drop its plans to buy T-Mobile, Sprint CEO Dan Hesse said Wednesday. Sprint, a leading opponent of the deal, reported quarterly results for the first time since the transaction fell apart. “We believe the industry outlook would have been bleak, had this takeover succeeded,” Hesse said. “We also believe that Sprint’s successful championing of a healthy industry and customer choice will have lasting benefits for the way business customers and consumers view Sprint.”
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Otherwise, Sprint Nextel had a good news, bad news message for the FCC, where staff are preparing the next Wireless Competition Report. The company saw strong growth in smartphone sales, selling 1.8 million iPhones during Q4, providing some competition for AT&T and Verizon. But at the same time, Sprint officials concede that they have been relying on roaming in part to make up for low investments in the company’s network. Sprint has seen some customer loss, Hesse said, as a result of higher prices for services.
"From 2008 to 2011, our wireless capex investments were approximately one third the spend of Verizon, one third of AT&T’s spend and one half the spend of T-Mobile USA,” Hesse said. Compared to the capex run rate in 2007, Sprint saved “an estimated $15 billion in capital” from 2008-2011, Hesse said. Sprint saw its 3G roaming costs accelerate 4 percent, to $215 million, in Q4 over same quarter last year. Its 4G roaming costs increased more than 500 percent to $162 million. Roaming expenditures were “effectively a trade off with our decision to spend less on 2G and 3G capex,” Hesse said.
Opponents of the FCC’s data roaming order, approved last April, had argued it could encourage some carriers to rely on roaming rather than building their own facilities (CD April 8/11 p1). Hesse emphasized that the company plans to increase spending on its network. “We minimized our capex investments in 2G and early 3G radio technology to keep our powder dry for investment in our new world-class Sprint Direct Connect service and in 4G LTE,” he said.
AT&T Senior Vice President Bob Quinn was sharply critical of Hesse’s statements, in a blog Wednesday. “Sprint executed a business strategy that began four years ago to lower capital investment. In other words, Sprint wanted to stop investing in its own network and ride on the network investments other carriers have made,” he said (http://xrl.us/bmrff5). “When spectrum is scarce, policymakers should ensure that spectrum is utilized most efficiently. That means letting the market drive the spectrum into the hands of competitors who have the incentives to deploy the spectrum quickly and most efficiently. As this morning’s Sprint call aptly demonstrates, when you intervene and put your regulatory thumb on the scale, you may -- unintentionally or not -- drive a result that is the opposite of that which you intended."
Some customers left Sprint Q4 as the cost of monthly contracts increased, said Sprint Chief Financial Officer Joseph Euteneuer. “We understood we would see some negative impact to customer churn,” he said.
Hesse saw rising prices as a sign the company is strengthening its position in the market. “During 2011, based on the improvements in our customer experience and in our brand, we were in a position, for the first time, to increase prices,” Hesse said. “We implemented an increase of $10 for our smartphone data plans for the first quarter of 2011. We also increased our other prices and fees during the year."
Sprint reported a net loss in the quarter of $1.3 billion, which beat analyst estimates but was a wider loss than the previous quarter.
Among other positive news, Sprint saw its “best ever” post-paid and pre-paid churn rates at 1.86 percent and 4.04 percent across the company’s brands, Sprint reported. Total net subscribers increased 1.6 million in the quarter, the best quarterly increase in six years, Hesse said. Net adds for the year were 5.1 million, Sprint’s best year for 2001. The bad news here was that post-paid gain and pre-paid gain both were well below consensus estimates. The bright spot was an uptick in wholesale and affiliate adds, with a gain of 954,000 versus consensus estimates of 499,000.
Sprint also announced Wednesday it’s adding Baltimore and Kansas City to the list of four cities the company previously said would get 4G LTE and upgraded 3G service by mid-2012. They join Atlanta, Dallas, Houston and San Antonio.
Sprint will reduce the number of towers it uses by more than 44 percent as it retires Nextel assets, from 68,000 to 38,000 towers, officials said.
"Perhaps most surprising, and most disappointing, is the fact that Sprint’s share of gross additions -- in the quarter in which they finally got the iPhone -- didn’t budge,” wrote Sanford Bernstein analyst Craig Moffett. “In Q3 it was 23.5 percent of the Big Three. In Q4 it was exactly the same.” Moffett offered an overall negative review of Sprint’s results. “One by one, the pillars of the Sprint recovery story have fallen,” he said. “There was the return-to-growth thesis. The margins-will-recover thesis. The first-to-4G thesis. The Sprint-will-get-the-iPhone thesis. ... Only one thing has changed: the stock price is now so low that there are no longer meaningful expectations to disappoint. Is this the bottom?"
"It always comes down to the call on this one,” said Wells Fargo analyst Jennifer Fritzsche. “As the stock has had a strong run going into the Q4 print, we believe investors had hoped for more of a near term turnaround in 2012. While there is admittedly a lot of noise with this story we believe Q4 showed many positives.”