New Sprint: Slow sub growth, increased revenues

Sprint Nextel today reported a net customer gain of 1.3 million subscribers and better-than-expected sales and profits in its first quarter as a combined company.

But the two companies’ combined subscriber adds from previous quarters and last year’s third quarter were much higher, making it appear that Sprint may be taking the opposite path of Cingular when it purchased AT&T Wireless last year. Then, Cingular and AT&T Wireless were posting lows for net subscriber additions, but in the quarter in which the merger closed the combined carrier posted a record growth of 1.8 million net subscribers.

In Q3 2004, Sprint and Nextel as separate companies added 1.7 million subscribers. In the first quarter, Sprint alone added 1.3 million subscribers while Nextel added another 810,000. But numbers began to fall off as the acquisition neared. The two companies’ combined net adds have leveled out for the last two quarters. Sprint Nextel ended September with 45.6 million subscribers, compared with provider Cingular’s 52.3 million. Verizon Wireless hasn’t yet reported third-quarter results, but it is likely to break the 49 million subscriber mark if its recent growth trends continue.

Financially, Sprint beat analysts’ estimates. The combined company reported $11.2 billion in revenue, up 8% over the pro forma results of its separate parts in last year’s third quarter. It also reported a net profit of $519 million, compared with the combined $1.9 billion loss the companies posted a year earlier. The company’s projections for the remainder of the year, however, weren’t so much in line with analysts’ expectation. Sprint Nextel predicted $44 billion in pro forma revenues for fiscal year 2005, up 8% year-over-year, and adjusted earnings before interest, tax, depreciation and amortization around $14 billion. The company also said it expected capital expenditures would total $6.4 billion, $5 billion of which is allotted to its wireless business for the integration of Sprint Nextel networks and its upgrades to CDMA 1X EV-DO.

While Sprint Nextel is a close third in subscriber base, it is definitely still the leader in average revenue per subscriber after its acquisition of Nextel. Sprint managed to keep its ARPU relatively close to Nextel’s industry-leading Q2 figure of $68 per month, with a Q3 post-paid ARPU of $65 a month, a number which would have been 34 cents higher if not for customer credits relating to Hurricanes Katrina and Rita.

That high ARPU, however, is only for customers on post-paid Sprint and Nextel plans. Sprint’s MVNO wholesale business and Nextel’s pre-paid Boost Mobile service are both growing at a fast clip, cutting into the ARPU numbers. Sprint Nextel count 7.6 million wholesale and affiliate customers (many of them from Virgin Wireless and Qwest MVNOs) in its overall subscriber base, accounting for more than 16% of overall customers. Meanwhile, those wholesale and affiliate customers produced only $227 million or 3.2% of Sprint’s service revenues. Those subscribers are bringing in roughly $10 of service revenue a month. Meanwhile Boost added 300,000 customers in the last quarter, bringing Sprint Nextel’s pre-paid subscriber base to 2 million, each with a monthly ARPU of $37.

If Sprint’s ARPU were adjusted to include its pre-paid, wholesale and affiliate customers would be about $5 a month less. But even at $60 a month, Sprint still easily beats out its three largest competitors which all maintain ARPUs in the range of $49 to $55 a month. But Sprint’s overall ARPU may continue to slip as it adds more wholesale and pre-paid customers--currently the two fastest growing segments of its business. Of the 1.3 million customers Sprint added last quarter only half were post-paid customers. In addition to Boost’s 300,000 pre-paid adds, Sprint gained another 213 million wholesale customers to bring the total number of MVNO subscribers to 4.6 million. Year over year, Sprint Nextel’s wholesale subscribers have grown 67% and its pre-paid subscribers have grown 148%, while its post-paid customers bring in the high $65 ARPUs have grown only 19%.

A way Sprint is likely to offset that trend is higher data ARPUs, which have been creeping up steadily each quarter. Pro Forma data ARPU for post-paid subscribers was $5.25 per customer, up 25 cents of 5% from the company’s combined results in the second quarter, and up 40% from last year’s Q3 pro forma data ARPU of $3.75. Sprint has been launching new data services at a rapid clip and has begun the rollout of its 3G networks in several markets. Sprint’s pride-and-joy industry-high data ARPU took a hit with the acquisition of Nextel, which didn’t have as robust a data service. In the second quarter Sprint, broke the 10% mark for data revenues. But combining the data services of Sprint and Nextel brought data down to 8.8% of all revenues.

Of Sprint Nextel’s $11.2 billion in revenues in the third quarter $8.0 billion came from its CDMA and iDEN wireless operations, making Sprint more than ever primarily a wireless company. Its long distance unit took in $1.7 billion, down 4% from last year’s third quarter. And its local business, which Sprint Nextel plans to spin off, also recorded $1.7 billion in revenues, up 5% year-over year.