Sprint PCS' (PCS) huge influx of third-quarter customers elicited mixed reactions as investors pondered whether to be excited about blowout subscriber numbers at the expense of other goals.
The wireless carrier announced incredible subscriber gains after the market Wednesday. Sprint PCS signed up 1.2 million subscribers, while most on the Street expected it to pick up somewhere in the 800,000 range. CFO Art Krause did not attribute the jump to consumer reaction to the events of Sept. 11, and instead emphasized that Sprint PCS excelled "in an economy that can at best be described as sluggish." Jaws dropped and eyes popped, but soon the Street learned the price of such monumental gains.
With the carrier spending $320 on each new customer in the quarter, those 400,000 or so extra bodies put a serious dent in the company's
EBITDA, which fell to $402 million from the second-quarter's $491 million. Expect the same in the fourth quarter, when the company plans to add another 1.3 million subscribers. Investors could live with one-time costs when they accompany new customers, but other metrics brought less welcome adjustments to Sprint PCS' results.
Analysts such as Merrill Lynch's Linda Mutschler are estimating that, in the second quarter, more than 72% of net new users signed up for special account spending limit (ASL) plans. Unveiled by Sprint PCS this spring, ASL plans offer credit-risk customers a chance to have a mobile phone that they might not usually be able to qualify for or afford. The plan was further modified in June to waive the upfront fees that accompany traditional wireless phone plans.
The third quarter's enormous boom in these lower-paying, higher-risk customers means that now about 25% of Sprint PCS's base is made up of ASL subscribers.
gets harassed by investors for its reliance on subscribers who select prepaid plans that drag down that carrier's average revenue per user figures and drive up churn numbers. Prepaid and ASL customers are not bound by the same contract terms as a monthly billed customer who plops down a starter payment and signs up for a one-year contract with a hefty cancellation fine.
AT&T Wireless has been trying to
convince the Street that it can turn prepaid users -- who typically ditch their plans more often and spend less than their postpaid counterparts -- into longer-term, lucrative customers. Sprint PCS has the same hope for its ASL subscribers. Expect investors to pressure the company, as they have hassled AT&T Wireless to keep overall customer statistics up. Carriers argue that as penetration in the U.S. grows from less than 45% of the U.S. population to Europe's 70% rates, they cannot ignore customers who may not want to sign up for a full-scale phone plan initially.
Sprint PCS already showed some of the initial effects of its lower-end customer gains in its third quarter when the company's usually stellar 2.2% churn rate slipped to 2.6%. Management warned that it could lose as much as 3% of its subscribers to churn in the fourth quarter. The forecast was met with grumbling on the Street.
Sprint PCS also added another $200 million to its capital expenditure plan, raising full-year spending to $3.6 billion from previous estimates of $3.4 billion "related to supporting substantial usage increases," according to Sprint COO Ron LeMay. It can't put off network capacity improvements with such huge jumps in subscribers.
By courting the lower-end customer, Sprint PCS is endangering the previously spiffy numbers that make it trade at a premium to its wireless peers. Of course, investors love to see more users dialing with Sprint PCS, and the company's numbers indicate that it might have signed up more than 25% of all new subscribers enrolled in the U.S. in the third quarter. Investors have to ask themselves, however, if they are satisfied with big growth at a cost.