Sprint Defines Success Downward

Sprint Nextel (NYSE: S  ) wants investors to think that the "improvement" found in its latest earnings report is something for investors to take comfort in. But considering the big picture, the company's spin brings to mind a last-place basketball team bragging about how it lost its most recent game by 20 points instead of its usual 35.

While revenues and earnings were roughly in line with Wall Street forecasts, Sprint reported that it lost "only" 578,000 monthly (i.e., postpaid) subscribers in the first quarter, less than the 623,500 expected by analysts, and well below the 1.25 million lost a year ago. Moreover, after factoring in prepaid and wholesale users, Sprint's net customer loss only totaled 75,000.

That all sounds encouraging, until you remember what the competition was doing at the same time. Even while dealing with the effects of a saturated U.S. wireless market, Verizon (NYSE: VZ  ) and AT&T (NYSE: T  ) reported net gains of 423,000 and 512,000 retail monthly subscribers, respectively. Their total net customer gains, meanwhile, came in at 1.5 million and 1.9 million.

It's also worth looking at the cumulative impact of Sprint's never-ending subscriber losses. Whereas the company had 41.6 million retail monthly subscribers less than three years ago, it now has less than 33.4 million, with further losses likely in store. Total subscribers are also down, to 48 million from about 54 million. Over the same time, AT&T's subscriber base has grown from less than 64 million to 87 million.

Sprint's cash-flow situation also shows how far the company has fallen from grace. Operating cash flow, which hit $2.9 billion during the third quarter of 2006, fell to just $1.1 billion. And in spite of Sprint's drastic attempts to cut capital spending, which include tapping Clearwire (Nasdaq: CLWR  ) to build and run the company's 4G network, free cash flow came in at just $506 million, down from $796 million a year ago.

Not encouraging numbers for a company that has more than $16.6 billion in net debt, with much of its debt load due over the next five years.

Sprint's clearly hoping that its lead in offering 4G services, highlighted by the rollout of HTC's EVO smartphone this summer, will give the company a leg up. But between a limited selection of handsets and the fast download speeds already provided by 3G services, I'm skeptical about it providing a huge boost. And looking at things long-term, Sprint's use of WiMAX as its 4G technology instead of the more popular LTE will make it even harder for the company to offer a compelling lineup of phones relative to competitors, and probably make Sprint a less appealing acquisition target for either a domestic rival, or a major foreign carrier such as Telefonica (NYSE: TEF  ) or America Movil (NYSE: AMX  ) .

Unless its 4G launch blows away the market's expectations, it's hard to see a way for Sprint to untangle itself from its mess. Its limited resources guarantee that it has no chance of matching Verizon's network coverage, and its smaller size guarantees that marquee smartphones such as Apple's iPhone and Motorola's (NYSE: MOT  ) DROID will usually end up with Verizon or AT&T. Maybe postpaid subscriber losses can be further reduced, but don't expect them to go away.

And as postpaid subscribers keep declining, cash flows are likely to follow. Quite possibly enough even for Sprint's depressed valuation to become unsustainable.

Fool contributor Eric Jhonsa has no position in any of the companies mentioned. Sprint Nextel is a Motley Fool Inside Value pick, Apple is a Stock Advisor selection, and America Movil is a Global Gains recommendation. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (7)

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  • Report this Comment On April 28, 2010, at 4:40 PM, PetePersona wrote:

    All of what you are saying is true.

    However, there are some things to note here.

    1. Their subscriber losses are diminishing (there is an upward trend)

    2. They improved in the prepaid market where the other wireless networks failed

    3. The subscriber gains you post from Verizon and AT&T are trending downward (while Sprint is trending upward)

    4.Their stake in the company that is rolling out the 4G Network puts them in a rather unique position of owning the expanded bandwidth. They are part owners of Clearwire they didn't just "tap" them to handle the network.

    The following is a mixture of opinion and fact but I trade what I know and from my personal experience this is what I know:

    1. Sprint's network is better than AT&T's - less dropped calls and faster speed in more places.

    2. Business use, where I work included, is all Sprint. Everything from Commercial trucking to SIP trunks for Voip Systems and everything in between is serviced by their network through various partners in several channels. I simply never come across the other guys.

    3. The HTC EVO is the best smartphone on paper. It's specs are far beyond any phone on the market and Android is every bit as smooth as the iPhone.

    4. They will be beating the other networks to market with a device and a network that is at least 5 times the speed of every mobile device in the marketplace. The 4G markets will reach an estimated 120 million Americans. This will create an inevitable surge towards their service.

    disclaimer: I own Sprint (Can't you tell ;) ). I also have it in MyCaps.

  • Report this Comment On April 28, 2010, at 7:16 PM, ddeleo wrote:

    if LTE commercially does not exist yet how can it be "more popular". Thats a funny statement to make. I'm surprised it can even be made in a serious article without everyone scratching their head after reading it. As far as globally, I'm waiting on the edge of my seat who gets the 4G spectrum in India. If LTE gets it then you might have a sliver of reality to your statement. But if Wimax gets it then, with India being the most populated country in the world, well you get my point. Finally, the clearwire network is moving forward as promised, and has such high capacity in its spectrum that they could easily (relatively speaking) move to LTE if they want (and have said they would), if indeed, LTE once it pokes it head out truly begins to support your statement.

  • Report this Comment On April 28, 2010, at 7:17 PM, pulte wrote:

    Right-on PetePersona!

  • Report this Comment On April 29, 2010, at 3:02 PM, RobertC314 wrote:

    @PetePersona

    "Their subscriber losses are diminishing (there is an upward trend)" - how do those stack up on a percentage basis? It would make sense that they would lose fewer subscribers when there were fewer to begin with.

    "The subscriber gains you post from Verizon and AT&T are trending downward (while Sprint is trending upward)" - same thing... How does that compare with the "new" additions to the market? If the overall market didn't grow as much then decreased subscriber gains are to be expected.

    "Sprint's network is better than AT&T's - less dropped calls and faster speed in more places." - My observation has been that, while they don't drop calls often, they do have a lot more issues with the initial connection

    "The HTC EVO is the best smartphone on paper." - Agreed, but personally I've had (and observed) a lot of quality issues with HTC phones. Maybe I just have bad luck.

    I am a Sprint customer, but my experience is not all positive. My primary reasons for not switching are: (a) There are horror stories from every carrier and any objective research will show that it's not clear one is any better than another, (b) They are by far the cheapest option for me, and (c) I don't really want an iPhone ;)

    I would, however, question an investment position in Sprint - it's been my experience that price-based competitors with declining market share are typically not a safe place for your money.

  • Report this Comment On April 29, 2010, at 3:53 PM, eb0783 wrote:

    I agree that this opinion can't be taken seriously with statements like the "more poplular LTE."

  • Report this Comment On April 30, 2010, at 5:33 PM, Rushster wrote:

    I believe the statement "more popular LTE" is due to the fact that every major carrier has selected it as their 4G network except Sprextel/Clearwire so it's a valid point. By the way, it is already deployed overseas.

    As far as the HTC EVO being just as good as the iPhone...glad you said "on paper." I've lost count of how many devices that have come out in the last year or so designated as "THE iPhone killer" (i.e.-Palm Pre, Blackberry Storm, etc...).

    Not sure where the statement that AT&T and VZW are on a downward trend on subscriber growth comes from. They have continued to add million plus every quarter.

    On Sprint adding prepaid customers...probably because the other major carriers (not Leap/Cricket or MetroPCS) don't push them due to ARPU being MUCH lower than the more valuable post paid customer...makes perfect sense to me.

  • Report this Comment On May 21, 2010, at 2:28 PM, MetatronX wrote:

    Actually just to let you know as a lot has changed in these past few weeks LTE is definetly not more "popular" at least in American Markets. IF anything the most "popular" T-Mobile and AT&T are going with HSPA+. AT&T initially was with LTE but bailed on the technology (which is certainly something to think about). Verizon is the largest provider in America and they have decided to go with LTE (for the time being) which is a deployment that we won't see at least until the end of 2011. Sprint is heavily invested in Wimax but they have also said it isn't mutually exclusive and they may incorporate both technologies into the mix. Sprint has similar coverage as AT&T yet their pricing is considerably lower. Sprint is really poised to make considerable leaps in the near future as long as they bring out a strong campaign for its new flagship phone the EVO. It truly is the best phone that will be on the Market and its only competitor will be the I-Phone 4G which from what we know isn't as impressive as the EVO both technically and innovation wise. I've personally invested in Sprint as the cost is low and I see an upward trend coming once the markets stabalize.

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