Churn Number Sweetens Pot at Sprint PCS

The service provider posts strong customer retention numbers in a thumbs-up for the wireless sector.
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Sprint PCS (PCS) sent wireless investors another positive signal Tuesday.

Sprint says it expects solid subscriber growth and only a modest customer defection rate in the fourth quarter. The Overland Park, Kan., wireless shop is the second player in as many days to offer a rosy prediction for the fourth quarter. On Monday, highflying walkie-talkie shop

Nextel

(NXTL)

once again

reaffirmed its 2003 forecast.

On Tuesday, wireless stocks were mostly flat as investors continue to catch their collective breath following last year's late-year run. Nextel, which nearly doubled over the course of 2003, slipped 7 cents to $28.87, while Sprint PCS was unchanged at $5.89.

About one million new users are expected to be added to Sprint's network, largely through reselling arrangements with

Virgin Mobile

. But the surprising news is that Sprint says it will add 390,000 new subscribers of its own, while losing just 2.7% of its users. That's nearly double the net subscriber growth some analysts had been looking for, and slightly below the so-called churn rate investors had expected.

Analysts say the latest word from Nextel and Sprint suggests that Wall Street's anxiety over new number portability rules -- a late-year development that gave customers the ability to keep phone numbers while switching service providers -- may have been slightly overblown. Some naysayers had expected customers to stampede to new carriers the minute they were allowed to bring their numbers with them, a trend that was expected to hit industry laggards such as Sprint PCS especially hard.

That said, with number portability rules not yet 6 weeks old, it may be a bit early to see any dramatic impact.

Blaylock & Partners analyst Rick Black says the full effect of number portability will likely be spread over the next three to four quarters. Black, who has a buy rating on Sprint, says he was surprised by the subscriber growth. Still, he's withholding judgment on the company's overall performance until he sees the full quarterly report.

One risk carriers face in adding a lot of new subscribers is ringing up a heap of associated expenses, from subsidizing the cost of cell phones to funding marketing and promotion offers.

Sprint PCS "will turn itself around, but we'll see some bumps in terms of costs and margins," says Black.

Analysts say each of the six national wireless companies embarked on an earnest campaign to retain customers as number portability approached. By dangling new phones and $50 service credits, the carriers have attempted to lock users into one- and two-year service contracts.

If Sprint PCS' low churn rate is any indication, those efforts may have paid off, at least for some.

That said, few observers are optimistic about

AT&T Wireless'

(AWE)

performance of late. The No. 3 wireless outfit has been plagued on at least two fronts by

software glitches that have hampered customer switches and activations.

There's a slim chance of fourth-quarter upside surprise for AT&T Wireless, says CIBC World Markets analyst Cannon Carr, who has a buy rating on the stock. Carr expects that AT&T Wireless will also report higher customer acquisition costs and advertising expenses that didn't show up in the third quarter.