RealMoney Silver - Sprint Sinks Cash Into a Comeback Hope

Sprint Sinks Cash Into a Comeback Hope
By Tero Kuittinen
RealMoney.com Contributor
8/9/2007 8:44 AM EDT

Revenue up 1.5%. Expenses up 8%.

That's one way to describe Sprint's (S) second-quarter performance.

Another would be to point out that the company is no longer losing contract customers, because it did sign up 16,000 new post-paid subscribers during the quarter. The total number of new subscribers (including typically low-margin prepaid customers) went up by 400,000, which is still unacceptably weak considering that AT&T's (T) wireless subscriber base swelled by 1.5 million during the quarter and Verizon (VZ) expanded by 1.3 million.

Sprint continues to fall behind its big rivals in market share -- even though it ramped up marketing spending. Of course, maintaining the 8% network maintenance and marketing spending growth pace won't be possible long with sub-2% revenue growth.

The early morning reaction to Sprint's quarter was a 5% spike in premarket trading. But as the Nasdaq opened, the share price started falling. The fact that Sprint is no longer losing subscribers can only offer fleeting joy -- it's hardly a feat that you can build a future on.

The revenue growth must be reignited. That's hard to do, as average revenue per mobile subscriber is falling -- down more than 2% to $60. That's still a very high level both internationally and domestically -- it could easily fall to $45 or below. After all, Sprint ranked No. 4 among U.S. mobile carriers in a recent JD Powers consumer satisfaction study. It trailed not only Verizon and AT&T but also T-Mobile, which is currently topping the quality survey.

Sprint's mobile ARPU is falling, it seems unable to reignite mobile subscriber growth, and land-line sales continue to shrink. Things are so gloomy that it's time to do something really wacky and hope for the best!

Hope Sprints Eternal

That's how things work in the telecom business -- when growth in the core business stalls, companies typically man up on risk tolerance, toss a couple of billion on the roulette table and hope to get lucky. Sometimes it works.

Sprint's big gamble is the new mobile WiMAX service launch slated for 2008. At the moment, the silver ball seems to be bouncing toward double zero. Sprint could not find a new financing partner for the multi-billion-dollar venture and was forced to join forces with another hopeful mobile WiMAX service provider, Clearwire (CLWR) .

And a few days ago, we found out that Clearwire's costs are spiraling firmly out of control. The company lost more than $118 million during the second quarter of 2007, about 20% more than consensus expectations.

So Sprint's partner in its wild mobile WiMAX adventure is just about the worst kind. Launching a new nationwide mobile network in a country the size of a continent is a huge challenge. Clearwire is a start-up company doing it for the first time, using untested technology and with no clear idea of what mobile WiMAX phones might cost and when they might arrive. The size of the laptop card market for high-speed mobile data is unknown, and the segment will be fiercely contested by AT&T and Verizon in 2008.

A fading mega-carrier making a desperate lunge for a new sales growth engine is joining forces with a starry-eyed rookie. This duo is embarking on a vastly ambitious national network rollout while playing the guinea pig for a brand-new network standard.

What could possibly go wrong?

While Sprint has tried to get the mobile WiMAX program going without blowing its budget, AT&T, Verizon and T-Mobile are undermining its core mobile business. Sprint's rivals are charging ahead on all fronts -- appealing new phones, cheaper tariffs, better quality and classier marketing. In the meantime, Sprint spends management time and money on a new network technology that will offer no benefits to its regular mobile customers for the next year or two.

In 2008, Sprint is likely to experience interesting times in the Chinese sense of the phrase.