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Sprint's iPhone: The Gift That Keeps on Taking

http://www.fool.com/investing/general/2012/02/09/sprints-iphone-the-gift-that-keeps-on-taking.aspx

Dan Radovsky
February 9, 2012

Sprint Nextel (NYSE: S  ) CEO Dan Hesse has put great emphasis on the iPhone being the key to good fortune ahead. At the beginning of Sprint's third-quarter conference call he stated, "We believe the number one reason new customers don't try Sprint has been 'No iPhone.'"

And his point was proven with Sprint's fourth-quarter earnings announcement that of the 1.8 million iPhones Sprint sold during the fourth quarter, 40% went to new customers. Those new subscribers helped the carrier to a net gain of 1.6 million users for the quarter, bringing up the company's total base to more than 55 million. That breaks down to 33 million postpaid, 14.8 million prepaid, and 7.2 million wholesale customers.

However, the lure of the iPhone came at a price. Check out the chart below. It shows Sprint's revenues for the fourth quarter (beginning in October, which was also when Sprint began offering the iPhone) zooming up precisely as its operating margin falls.

Sprint's revenues vs. operating margin

Source: YCharts.

Sprint's deal with Apple (Nasdaq: AAPL  ) was for the carrier to buy $15 billion worth of iPhones over a four-year period, but from the chart it looks like the more iPhones Sprint sells, the deeper in the hole it's going to get. For during the fourth quarter, that hole became $1.3 billion deeper. That wasn't helped by Sprint's OIBDA, or operating income before depreciation and amortization, falling to 9.5% during the quarter, down from 16% during the same period last year.

Could this be what CEO Hesse meant during his third-quarter conference call when, in a tortured Moneyball analogy, he compared Sprint's getting the iPhone to a baseball team signing A-Rod to score runs and fill the seats in the stadium? "iPhone has an expensive contract, but he's worth every penny," he said.

To be fair, Sprint is not the only carrier facing the iPhone paradox, the need to entice customers to sign long-term contracts by offering the iPhone even though the company must eat much of that phone's cost. AT&T (NYSE: T  ) , which sold 7.6 million iPhones during the fourth quarter, saw the same rising-revenues-with-falling-margins-iPhone phenomena:

AT&T revenues vs. operating margin

Source: YCharts.

Verizon (NYSE: VZ  ) , which sold 4.2 million iPhones, wasn't immune, either:

Verizon revenues vs. operating margin

Source: YCharts.

Apres iPhone: LTE
Capital expenditures also contributed to Sprint's negative bottom line. The costs of building and maintaining the company's infrastructure ate up $3.13 billion for the year, compared to $1.94 billion for 2010. But to stay competitive with rivals AT&T and Verizon, Sprint must be able to produce a 4G LTE network. Verizon already has 195 markets covering 200 million