Sprint PCS reports higher churn

Sprint PCS stock slumped after the company this morning reported a significant increase in churn during the third quarter. The carrier’s shares fell 11.7%, or 32 cents, to $2.42 in mid-day trading.

Sprint PCS said it added 1.7 million customers in the third quarter, slightly above second-quarter numbers, but the numbers reported during the company’s third-quarter conference call will be significantly lower because of a dramatic increase in customer churn.

Sprint PCS said many of its Clear Pay customers were deactivated because of fraudulent practices or failure to pay. As a result, churn will move into the high three-percent range, up from 2.9% in the second quarter. The second quarter’s net additions were just 308,000, also primarily because of high churn.

Sprint PCS introduced Clear Pay, its version of pre-paid service, in 2001, which led to significant increases in new customers. As this customer segment has grown, so has the number of subscribers who have failed to pay.

“A big part of the problem is [Sprint] PCS’ substandard customer base,” Todd Bernier, wireless analyst with Morningstar, said in a recent research report. “Approximately 50% of gross adds in the June period were subprime subscribers, a segment with poor credit quality. These users may lead to big growth numbers (or at least they did), but the downside is poor churn rates.”

The carrier said it is making changes to the Clear Pay plan by tightening credit screening requirements, making more customers pay deposits and limiting the use of automated payment vehicles by new Clear Pay customers.