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2/8/2012
10:01 AM
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iPhone Subsidies Hurt Sprint's Bottom Line

Sprint broke its own records for new subscribers and revenue per user, but still lost $1.3 billion in the fourth quarter, thanks in part to iPhone subsidies.

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Sprint can't seem to catch a break. The nation's third-largest wireless network operator added a record 1.6 million net customers during the fourth quarter and ramped up average revenue per user (ARPU) by $3.69.

The fourth quarter of 2011 also marks the first time Sprint offered the Apple iPhone, and it sold 1.8 million of them. The high cost to subsidize the iPhone, however, contributed to Sprint's $1.3 billion shortfall.

At the end of the year, Sprint had more than 55 million customers. Only 60% of them--or 33 million--are the lucrative post-paid type of customer. That figure includes 28.7 million proper Sprint customers and 4.3 million Nextel customers. The rest of Sprint's customer base comes from its prepaid operations (think Virgin Mobile USA and Boost Mobile) to the tune of 14.8 million, and finally 7.2 million wholesale customers.

[ Apple has reclaimed the lead among smartphone makers. See iPhone 4S Propels Apple To Smartphone Lead. ]

Sprint's net customer additions came from 668,000 new retail subscribers and 954,000 new wholesale customers. In other words, 60% of its new customers came from third-party resellers. That's rather lopsided. Of note, Sprint lost another 378,000 post-paid Nextel subscribers during the fourth quarter. This is one issue that's hurting Sprint. As it transitions away from the iDEN network, assumed in its Nextel acquisition, it has been bleeding profitable Nextel customers.

Sprint's wireless business raked in $6.9 billion in quarterly revenue, which was up compared to the previous quarter and the year-ago quarter. The quarterly year-over-year improvement was primarily due to higher postpaid ARPU as well as an increased number of net prepaid subscribers as a result of additional market launches. Wireless postpaid ARPU increased year-over-year from $55.26 to $58.59, the largest year-over-year postpaid ARPU growth in the company's history.

Total wireless net operating expenses were $8.4 billion in the fourth quarter, compared to $7.6 billion in the year-ago period and $7.4 billion in the third quarter of 2011. iPhone subsidies really killed Sprint's margins for the quarter. It spent $1.7 billion in equipment subsidies (it brought in $910 million in device sales, but spent $2.6 billion subsidizing those devices). The increase in net subsidy is primarily due to the launch of the iPhone 4 and iPhone 4S, which on average carry a higher subsidy rate per handset as compared to other handsets.

Sprint also blamed its Network Vision project for a chunk of its quarterly loss. Sprint is in the middle of reorganizing its network business. In phasing out its iDEN network, it's trying to convince its Nextel customers to jump to its CDMA services instead. It plans to re-purpose the 800-MHz spectrum used by the iDEN network to add voice capacity for its 3G customers.

It is also undergoing a costly switch in 4G strategies. Sprint was early to offer 4G services in the form of WiMax. Sprint's bet on WiMax was a bad one, however, and the company is now transitioning from WiMax to LTE 4G, which is what AT&T and Verizon Wireless are using for 4G technologies. The cost to maintain existing services for its customers while it adjusts its network infrastructure to new technologies are sure to weigh Sprint down for many quarters to come.

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CHDFW
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CHDFW,
User Rank: Apprentice
2/21/2012 | 4:12:38 PM
re: iPhone Subsidies Hurt Sprint's Bottom Line
I feel like this is more of an accounting issues than anything. It does seem weird to say in the same quarter, best quarter as far as sales go due to iPhone sales, but hurts our quarterly profits because we subsidize. It seems to me that allocating the cost of the subsidy over the term of the contract would be the way to go instead of taking the expense in the period the device was sold. Why isn't this done??
LJONES913
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LJONES913,
User Rank: Apprentice
2/8/2012 | 7:19:36 PM
re: iPhone Subsidies Hurt Sprint's Bottom Line
Sprint subsidizes this year and is repaid in the subsequent years by monthly fees from subscribers. This kind of headline distorts the reality -- Sprint increased its subscriber base selling high end cell phones and services and has every reason to expect to profit thereby.
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