Wireless Carriers: Sprint and T-Mobile

On August 6, Sprint Nextel Corp. (NYSE: S) reported second quarter results that beat analyst estimates. The new CEO, Dan Hesse, has put in place a turnaround plan for improving customer experience, building the Sprint brand, and increasing profitability. The plan is already showing results: the churn rate decreased to 2% from 2.45% last quarter.

But this is little progress compared with AT&T and Verizon, who are bringing down their churn rates to about 1% and adding more than a million customers every quarter. Compared to 1.09 million subscribers last quarter, Sprint lost 901,000 customers this quarter, including 776,000 postpaid and 250,000 prepaid customers. The total customer base now stands at 51.9 million, versus 54 million last year. Sprint also managed to hold on to its high-paying customers and despite the drop in customers, its ARPU was stable at $56, same as last quarter but down 7% y-o-y. Helping in these small achievements is the new $129 Samsung Instinct, an iPhone rival touchscreen smartphone that was released on June 20 and saw record sales.

Revenue was $9.1 billion, down 11% y-o-y and 3% q-o-q. Net loss was $344 million or diluted loss of $0.12 per share, compared to net income of $19 million last year. Adjusted EPS was $0.06 per share versus analyst estimates of $0.03 per share.

Total debt was $23 billion, offset by cash and marketable securities of $3.5 billion.
Cost reduction efforts include a stringent spending review process and minimization of external labor costs. Sprint has streamlined its distribution channels by more than 25% since the start of 2008.

By segment, wireless service revenue was $7.0 billion, down 11% y-o-y mainly due to lower ARPU and fewer subscribers. Wireline revenue was $1.6 billion, down slightly sequentially and y-o-y as legacy voice and data declines exceeded Internet revenue growth. Internet revenue grew 42% y-o-y due to strong demand for Global MPLS services from Enterprise customers and the increasing base of cable subscribers using VoIP services.

As for Q3, Sprint expects to report higher customer losses due to seasonality. It canceled plans of raising money within one day of the results announcement, and its shares bounced. It is currently trading around $9 with market cap of about $25 billion.

Unlike Sprint, T-Mobile USA added customers: 668,000 in Q2, down from 981,000 additions last quarter and 857,000 last year. However, thanks to the SunCom acquisition completed in Q1, total customer base grew to 31.5 million from 26.9 million last year. The decline in additions is mainly due to higher churn following the expiration of two-year contracts introduced in April 2006. ARPU was $51, down from $52 last year. Things might look up for T-Mobile with the BlackBerry Bold being released on the network later this month. It is also planning to launch a mobile phone application store similar to the Apple iPhone App store.

T-Mobile’s parent company Deutsche Telekom AG (NYSE:DT) reported its Q2 results on August 7. T-Mobile USA had revenue of $5.47 billion, up 14.4% y-o-y. Net income was $452 million, up from $350 million last year but down from $462 million last quarter. Deutsche Telekom AG reported revenue of €15.13 billion ($23.39 billion), down 3% y-o-y. Net profit declined 35% to €394 million euros ($608.2 million).

DT is trading around $17 after hitting a 52-week low of $15.53 on June 19. Market cap is around $75 billion.