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Sprint’s iPhone gamble widens losses

Wed, 02/08/2012 - 2:22pm
Maisie Ramsay, Wireless Week

Sprint's bet on the iPhone helped it bring in the highest number of new customers in six years during the fourth quarter, but the success came at a hefty price.

The operator said Wednesday that its losses ballooned to $1.3 billion, from $929 million the previous year, after the substantial cost of subsidizing the iPhone and upgrading its network offset a 5 percent increase in sales, which hit $8.7 billion.

Sprint sold 1.8 million iPhones between the time it first got the phone in October and the end of last year. About 40 percent of the smartphones were sold to new subscribers, bringing in 720,000 customers.

CEO Dan Hesse said in a conference call with analysts that Sprint "sold more of them than our initial plans had indicated." Even so, Sprint's iPhone sales were well behind those of its larger rivals AT&T and Verizon Wireless. AT&T activated 7.6 million iPhones, and Verizon sold 4.3 million iPhones during the last three months of 2011.

Overall, Sprint added 1.6 million net subscribers, including 161,000 net postpaid customers – its best overall net adds since 2006. The operator added 507,000 net new prepaid customers and 954,000 net wholesale customers through MVNO deals inked last year.

Sprint will pay Apple $15.5 billion over the next four years for the iPhone. Although Sprint iPhone sales so far have been slower than its competitors, “we see no reason to be concerned at all about our volume commitment,” Hesse said.

CFO Joe Euteneuer said in October that the iPhone subsidies cost $200 more than for other smartphones. While the iPhone is seen as critical ammunition against Sprint's competitors, the company reportedly won't turn a profit on the device until 2014.

The combined impact of the iPhone and its Network Vision modernization project reduced its operating income before depreciation and amortization (OIBDA) by $684 million, lowering OIBDA margins by 8.8 percentage points to 10.8 percent.

Despite its substantial impact on profits, the iPhone was still a boon for ARPU. Postpaid ARPU rose to $58.59 after declines in its iDEN base were offset by increases in Sprint-branded services. Prepaid ARPU dipped to $26.62 after the addition of lower ARPU Assurance Wireless customers diluted sales numbers.

Postpaid churn rose slightly to 1.98 percent on a higher number of so-called "involuntary deactivations," or customers kicked off Sprint's network for failing to pay their bill or violating their terms of service. Prepaid churn dropped to 3.68 percent from 4.93 percent in 2010 as low-churn Assurance Wireless customers added to improvements with Sprint's Virgin Mobile and Boost brands.

Sprint also announced some developments on the LTE front. It plans to launch LTE and upgrade its CDMA network in Baltimore and Kansas City by the middle of this year, adding to its previously announced launches in Atlanta, Dallas, Houston and San Antonio.

The company expects to have 12,000 multimode LTE/CDMA base stations for its Network Vision project up and running this year. Sprint's iDEN network is getting shut down as part of its network modernization effort, and Sprint said it plans to decommission 9,600 cell sites from its Nextel brand this year.

Sprint's decision to speed up its Network Vision plan raised the cost of the project to $10 billion through 2013. The expense of the network upgrades, iPhone subsidies and debt payments forced Sprint to raise $4 billion in private placement debt funding last quarter to maintain its target $2 billion cash reserve. It expects to raise between $1 billion and $3 billion in additional capital through equipment financing or debt markets in the coming quarters.

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