No one said Sprint Nextel's turnaround would be easy: Dan Hesse's wireless carrier posted another loss, missing the Street's revenue projection and losing almost a million subscribers -- but that was an improvement.
On the company's earnings call, CEO Dan Hesse noted that Sprint has "not turned the corner yet" in its turnaround, but that he's seeing encouraging signs, such as better customer retention and customer quality, and solid uptake of his $99/month "Simply Everything" plan, which is well above the average monthly bill size.
Sprint said the effects of Apple's (AAPL) iPhone -- available exclusively from rival AT&T (T) -- have been "greatly muted" by its own similar device, the Samsung Instinct. The Instinct isn't as good as the iPhone, but it's cheaper -- and Sprint execs bring up a valid point that their 3G data network is much, much larger than AT&T's.
No specific commentary on potential M&A, such as spinning off the Nextel network, but Hesse noted that nothing is off the table.
Sprint (S) reported $9.06 billion of Q2 revenue, down 11% y/y and well below the Street's projected $9.17 billion. Its net loss was $344 million, or 12 cents a share, compared with a profit of $19 million, or 1 cent a share, during Q2 2007. Adjusted EPS before amortization came in at 6 cents per share, beating the Street's 3 cents per share estimate.
The carrier's customers continued to flee: It lost 901,000 net subscribers during the quarter. But that's an improvement over Q1, when it lost 1.1 million subs. And its "post-paid" subscriber loss of 776,000 subs -- high-value customers that sign long-term contracts and pay monthly bills -- was not as bad as the 906,000 net loss that analysts polled by Reuters estimated. In fact, Sprint's post-paid churn -- the percent of subscribers who leave the service each month -- fell to a post-Nextel-merger low of 2%.
Sprint expects things to get worst next quarter: It's projecting higher post-paid subscriber losses in Q3 "due to a seasonal uptick in churn," and sees "modest pressure" on its customers' average monthly spending for the rest of the year. That means lower adjusted OIBDA next quarter.
Sprint Nextel also expects Free Cash Flow to improve substantially in the second half of 2008. Furthermore, the company expects to remain in compliance with its debt covenants for the foreseeable future and expects to reduce gross debt by at least $1 billion by the end of the third quarter.
Key Stats:
Revenue: $9.06 billion vs. $9.17 billion consensus
Adjusted EPS: $0.06 vs. $0.03 consensus
LIVE Conference Call notes:
10:58 Waiting for call to begin.
11:01 Going over slides, figures from release.
11:03 Dan Hesse joins. Plans to reduce churn, rebuild Sprint brand, etc. Pleased to report very significant sequential improvement in postpaid churn to just under 2%. Largest sequential improvement by any national wireless carrier since 2004, best churn since merger. Sequential decline in port-outs best since merger. Better than expected ARPU and earnings. Stable ARPU.
11:04 Customer experience being reviewed weekly. Store reps have authority and tools to help.
11:05 Now treat existing Sprint customers as most important people in the stores.
11:08 New push-to-talk performing well; dropped calls, call quality metrics solid. Customers now all on unified billing platform.
11:10 More customer service metrics. Removing underperforming call centers.
11:13 Data ARPU up to $12 for all postpaid, up to $15 for CDMA customers.
11:16 Closed 50 stores, got rid of 25% of crappy independent retailers.
11:16 Cable VoIP up 60% y/y, past 4 million subs.
11:17 Have not turned the corner yet, but believe have a good plan in place.
11:18 Reducing debt, improving cash position main goals for new CFO. Will evaluate more one-time events like selling towers.
11:20 Accountability! Expect substantial diligence. Now going over results from release.
11:22 Bad debt 1.9% of service revs, down from 2.9% from Q1. Pleased. Taking on fewer subprime customers.
11:27 Wireline capex continues to support IP service, including cable VoIP. Capex will be below 2007 levels.
11:29 FCF: Cash capex beat reported capex by $250 million. Expect FCF to improve substantially from first half, will remain within debt covenants; reducing debt by $1 billion in Q3.
11:30 Most improvement in churn and ARPU was independent from seasonality. Expect sequential gross adds to moderate in Q3. Improved customer quality.
11:31 Q&A begins.
11:32 Slip in gross adds. View on expanding gross adds? Additional campaigns? Ways to limit share loss to smartphones? We think best ROI is on retention than on acquisition. Made a decision to allocate more of marketing on retention vs. acquisition. Reducing less-profitable distribution channels. Focusing on quality vs. quantity.
11:33 Not only is PDA/smartphone mix expanding, but Simply Everything plan helps too, plus wireless broadband footprint.
11:37 No question, we have to be effective in acquiring high value customers and reducing churn. Still roughly 2x churn level of major carriers.
11:39 ARPU stabilization a lot of movement going on - greater stability due to Simply Everything. New customers signing up for it at higher than expected rates. Encouraged by number of high value customers no longer leaving us. Still some seasonal/competitive ARPU pressure with downward motion in Q3, Q4.
11:41 Increases in upgrades among customer base, which drives up some subsidy costs, and higher PDAs. Offset by lower gross adds than before because of higher level of selectivity. Level of equipment spend per gross add good pace going forward? Sure. iPhone? Last year we dind't have, port-out activity "greatly muted" - very high level of upgrades going to Instinct.
11:48 Might get rid of $89 voice-only unlimited plan; less than 1% take rate. $99 plan doing really well.
11:53 When churn gets better, how do you re-ramp gross adds without lowering credit standards? Brand is important.
11:57 Still working on iDen, but nothing is off the table -- as in, could also sell Nextel.
11:57 Believe there's a new class of handsets that go beyond PDA. iPhone is clearly in that class, believe Instinct is, too. Opened up possiblity of what data can do in mobile environment.
12:02 Where is churn improvement coming from? Across the board; very substantial improvement is in early life churn. Focusing on front end, making sure we have the order correct at the point of sale, eliminating issues customer may have on a proactive basis.
