Prepaid, 4G returns Sprint to customer growth

Sprint (NYSE:S) may have posted another loss in the second quarter, but the operator is growing for the first time in three years. Sprint recorded net subscriber additions for the quarter ending June 30, driven not only by its continued success in prepaid, but by the addition of the newest smartphone in its arsenal, the HTC EVO 4G.

Sprint hasn’t revealed any specific numbers on EVO sales, though analysts have estimated that Sprint sold 300,000 in its first few weeks. Its success has apparently outstripped Sprint’s ability to keep the device in stock, as the operator has reported backlogs from HTC and prohibited employees from personally using the device to save them for customers. But on Sprint’s earnings call, CEO Dan Hesse said that while the EVO helped drive activations, Sprint would have seen customer gains without it. He said Sprint’s improvements were “foundational” and not that the result of any particular device.

That might be a hard sell on Sprint’s part, considering its net adds were a modest 111,000 subscribers. If Sprint got anywhere near the 300,000 EVO sales — even assuming many of them were existing customers — the 4G phone would have provided just the push necessary to vault Sprint into positive customer growth. Hesse might be setting expectations for the third quarter, which he warned would be impacted by the launch of the iPhone 4 on AT&T’s (NYSE:T) network.

Sprint suffered from postpaid subscriber loses of 228,000, mostly from its Nextel iDEN network, but it made up the difference in prepaid gains of 173,000. That’s still a loss of 55,000 retail customers, but Sprint made up the difference with a 166,000 wholesale and affiliate customers. According to Bernstein Research senior analyst Craig Moffett, those numbers should be a cause for concern, namely because they demonstrate a shift from the high end to the low end in three critical areas: from postpaid to prepaid, from retail to wholesale, and from mid-tier prepaid plans like Boost Unlimited to low-dollar prepaid plans like Sprint’s Assurance plans.

Sprint’s average revenue per subscriber (ARPU) dropped from $1 year-over-year to $55 a month for postpaid, but its prepaid ARPU plummeted from $34 to $28. Moffett singled out Boost’s loss of 465,000 prepaid subscribers, significant because prepaid has been Sprint’s primary growth driver over the last few years.

“Their prepaid flagship brand Boost, once upon a time the basis of bull forecasts for Sprint (remember the claims that Boost unlimited subscribers were almost as valuable as postpaid?) has gone into a tailspin,” Moffett said. “Relatively low-value wholesale and affiliate subscribers accounted for almost half of their overall prepaid and wholesale gain.”

The losses on the iDEN network, however, show that Sprint’s growth in both prepaid and postpaid has shifted back to the CDMA network, which is good news if Sprint does plan to sell or shut down the Nextel portion of its business.

Virgin, which Sprint recently reconfigured as its high-end prepaid brand, and Assurance, which targets the extremely budget conscious, delivered 638,000 CDMA customers in the quarter. Those numbers will likely increase more in the coming quarter as Sprint brings its new pay-by-the-minute brand, Common Cents Mobile, to Wal-Mart stores, though it will likely have an even bigger negative impact on prepaid APRU. The primary Sprint brand accounted for 136,000 new postpaid CDMA customers. Considering Sprint, with 48.2 million total customers, is now little more than half the size of AT&T, its CDMA customer gains of 774,000 would have been quite impressive if it could divorce itself from the iDEN network.