Sprint Makes Progress, But It’s Just a First Step
During Sprint Nextel’s earnings call yesterday, CEO Dan Hesse compared the company’s progress to the Arizona Diamondbacks’ and Indianapolis Colts’1999 season:
“Both teams lost in the first round of the playoffs, so in spite of their improvements, they finished the season far from satisfied, but their enormous progress [indicated] better things to come.”
The analogy is apt. During the fourth quarter, Sprint added new postpaid customers for the first time since the second quarter of 2007, and its total net adds passed the one million mark – the first time that’s happened in nearly five years. Its churn dropped, its customer satisfaction ratings improved and sales rose slightly.
But there are the other items, like Sprint’s persistent losses, flat ARPU, tumultuous iDEN business and churn that remains higher than its competitors. Sprint’s success in luring new postpaid customers shows some promise, but there are still some fundamental issues in its business that need to get sorted out before the company’s turnaround is declared a success.
One of the biggest issues facing Sprint is its inability to post an annual profit. The company lost $3.45 billion last year, lost $2.43 billion in 2009, lost nearly $2.8 billion in 2008, and hemorrhaged $29.5 billion in 2007 on charges related to the merger of Sprint and Nextel. Sprint-Nextel has yet to prove that it can be a profitable company, and the sluggish ARPU figures in its most recent earnings don’t bode well for its ability to get itself into the black. Yes, the company’s prepaid business is chugging along nicely, but it’s considerably less lucrative than its postpaid segment, which is facing down a new threat from Verizon’s iPhone and its upcoming lineup of LTE smartphones.
Then there’s Sprint’s troubled relationship with Clearwire, which cost Sprint $58 million in 2010 and $1.12 billion in 2009. Sprint bowed out from Clearwire’s latest funding round amid continued disagreements about Clearwire’s retail strategy and a financial crunch that threatened to put the WiMAX operator out of business. Sprint’s 4G strategy is dependent on Clearwire’s success - and since Sprint is also its majority shareholder, when Clearwire’s feet are to the fire, Sprint burns too.
Sprint has some good things going for it – it’s finally upgrading its network, customers seem to be responding to its lineup of WiMAX smartphones, and it’s getting a handle on subscriber defections. But it also has to get the fundamental economics of its business sorted out.
Hesse said he warned investors during his first earnings call at Sprint that the company’s turnaround would not be quick and that there would be no magic bullets. In the subsequent years, his cautiously optimistic forecast has proved accurate: getting Sprint on track has been a slow, difficult task. Yesterday, Hesse said that the company’s “progress has been significant and we're on the right track.” To judge by its fourth quarter results, Hesse may be right - but the company still has a long way to go.