The second quarter ended as a bit of a mixed bag for struggling wireless operator Sprint Nextel, as it reported a huge drop in profits but also grew its subscriber base.
Sprint's profits dropped 95 percent to $19 million, down from $370 million in the same quarter a year earlier, largely due to high costs associated with building out the company's 4G WiMax network. But at the same time, Sprint added 373,000 new customers and reduced its churn rate, a major feat for a company that has been bleeding customers for past several quarters.
Most of its new subscribers came through the company's wireless subsidiary Boost Mobile and its wholesale partner Virgin Mobile USA. About 16,000 of the new additions were post-paid customers, or customers who pay a monthly fee for services. These are considered highly valuable customers. And Sprint has done a poor job up to this point attracting or retaining them. In the past three quarters the company has lost roughly 714,000 of these high-value customers.
In the second quarter, Sprint also improved its churn rate--the rate at which customers drop its service. The company reported that it had reduced churn to 2 percent, compared with 2.1 percent earlier and 2.3 percent in the first quarter.
Still, Sprint lags far behind its two main rivals, Verizon Wireless and AT&T. In total Sprint now has 54 million wireless subscribers. In the second quarter, Verizon Wireless added 1.6 million new subscribers for a total of 62.1 million subscribers, while AT&T added 1.5 million, giving it a total of 63.7 million. Many of the gains these operators reported are likely due to Sprint's losses.
Sprint's CEO, Gary Forsee, said he was pleased with the results. While no one likes to see profit drop like Sprint's has done, Forsee brushed this off as a necessary result of investing in the company's future.
Sprint is spending about $3 billion to build a new 4G WiMax network that will more than double network speeds. The company recently announced a partnership with network provider Clearwire to help build the network. And it recently announced a revenue-sharing deal with Google to integrate the search company's applications into a service offering. The WiMax network will initially launch in Washington, D.C., Baltimore and Chicago by the end of the year. And it will be available to 100 million people by the end of 2008.
Even though some Wall Street analysts are skeptical about Sprint's WiMax strategy, they seemed content with Wednesday's results. The company's stock was up $0.54, or 2.72 percent, to $20.75 in midmorning trading.
While the addition of post-paid customers was definitely a positive step, Sprint still has a long way to go. The company seems to do well among business users, touting its 3G EV-DO network. But it struggles in the consumer market.
"We see our network as a competitive advantage," Forsee said. "We aren't going to back off on that. The great network experience helps us stand out, and it sets up the WiMax discussion."
Still, Sprint can't ignore its shortcomings in the consumer market. Many of its customer losses over the past few quarters were due to network issues associated with Nextel. Sprint has said that it is working out these issues and doesn't expect these problems to continue.
But Sprint also has other issues when it comes to the consumer market. For example, it has a poor reputation for customer service. In June, Sprint ignited a public relations nightmare when it notified about 1,000 high-maintenance customers--who, in Sprint's estimation, had called customer support too often--that it would be cutting off their service. While Sprint may have reduced some costs by terminating these customers, it likely damaged its image among many existing and potential customers.
And if these issues weren't enough, the company is also facing pressure from the Federal Communications Commission to make good on its promise made three years ago to vacate Nextel's old airwaves. Nextel's service, which uses iDEN technology, often interferes with public safety and emergency responders who use adjacent spectrum for communications. The FCC said earlier this week it may ask Sprint to pick up the pace.
Forsee tried to downplay the pressure from regulators and tried to reassure analysts and investors that the concerns about this issue were overblown in the press.
"We are working in an incredibly coordinated way with public safety to ensure we match our network responsibilities in a market-by-market way," he said.