Sprint blames economy for Q1 customer losses

Update 7:22 a.m. PDT: This story was updated with comments and information from the company's conference call.

Sprint Nextel is blaming the economy for a steep decline in subscribers, though its prepaid and wholesale businesses are seen as important growth areas as the company faces stiff competition.

Meanwhile, financial losses mounted in Sprint's first-quarter earnings released Monday.

"We are happy about the success of Boost Unlimited (prepaid, no-contract service) and our wholesale business," Dan Hesse, Sprint's CEO said during a conference call with analysts and investors on Monday. "But the economy has created some challenges."

Sprint reported a loss of $594 million or 21 cents per share, for the three months that ended March 31, a decline of 18 cents per share from the same quarter a year ago. Revenue was also down about 12 percent to $8.21 billion. Analysts had expected about $8.28 billion in revenue.

The company lost a total of about 182,000 wireless customers during the quarter to end with a total of 49.1 million.

Meanwhile, competitors AT&T and Verizon Wireless each added customers for the quarter. AT&T added 1.2 million new wireless subscribers and Verizon Wireless added 1.3 million.

Contract customers are considered valuable because they typically spend more on their service per month. And because of the contracts, they don't cancel service as often as customers without contracts.

Sprint has been losing contract customers for several quarters due, in part, to poor customer service and increased competition from AT&T and Verizon. But Hesse said on the conference call that the heavy losses were business subscribers--not consumers.

He said that layoffs and corporate downsizing over the past few months have led many businesses to reduce the number of BlackBerry devices and other phones used by employees. This was especially true in manufacturing and construction, which are big subscribers to Sprint's push-to-talk service on Nextel's iDEN network. Hesse said that Sprint relies more heavily on business subscribers than its competitors do and, as a result, has been affected more by these layoffs than its rivals. That said, Hesse believes that when the economy turns around, business subscribers will come back.

The loss of these business customers contributed to an increased churn rate. Churn for the quarter, or the rate at which customers cancel service, was 2.25 percent in the first quarter. This was up from 2.16 percent in the fourth quarter, but down from 2.45 percent a year ago.

On a positive note, Hesse said that Sprint's Simply Everything plan, which was launched last year and offers unlimited voice, texting, e-mailing, and Web surfing for $99 a month, has helped increase monthly spending for individual subscribers.

"Now if you look at our churn characteristics, it's inversely related to the lowest churn among the highest ARPU (average revenue per user) customers," he said. "And the highest churn is among the least valuable customers. So churn is actually better than it looks."

The biggest success story of the company's quarter came from the launch of its Boost Unlimited. This service, which offers unlimited voice and messaging service for a flat rate of $50 a month with no contract, operates on Sprint's iDEN network, launched in late January and has been deemed a big success so far.

"There is no question that there is a movement toward prepaid," Hesse said. "And we currently have some strong offers out there."

Hesse said he believes that the prepaid market will actually help expand the entire wireless market.

"Some of these prepaid customers are people using cell phones for the first time," he said. "So I think overall, as an industry, we will see more revenue growth than we would have seen without prepaid services."

Sprint also saw some uptick in subscriber growth on its wholesale network with 394,000 new customers. And Hesse said that growth in wholesale is a big opportunity and that he sees more growth coming from devices, such as Amazon.com's Kindle e-book reader.

Beyond products and services, Sprint also did a fairly good job cutting costs. While some of the losses in the first quarter were one-time charges associated with its staff reductions, Hesse said that the cuts will help the company generate more cash to help it pay down its debt obligations.

Hesse didn't comment directly on a report from The Wall Street Journal that said the company is planning to outsource its network operations to telecommunications equipment maker Ericsson. But he said the company is focused on generating cash and would consider "alternatives that makes a lot of sense for the company."

Looking forward, Hesse said he expects to see more growth from the Boost Unlimited servoce. And he said the company has a strong lineup of new handsets for its subscribers with contracts. The handsets include the Palm Pre, which is due out this summer. Beyond that, he said, Sprint is expecting to see some growth from 4G subscribers on the Clearwire network who will want dual-mode devices that switch between 3G and 4G services. Clearwire is expected to have 10 markets up and running with the new 4G WiMax service by year's end.

"Most of the major initiatives in the postpaid market are geared to have a major impact in second half of the year," Hesse said, referring to customers with contracts. "With the Boost Unlimited (prepaid) service, it's still too early to tell. We see no evidence (that this was due to a big grand opening). Our goal is to have similar net additions and growth for Boost Unlimited in the second quarter as we had in the first quarter."