Sprint PCS Feels the Burn of Rising Churn

The cell-phone service provider expects more customers to leave this year.
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That hiss is the sound of wireless customers leaking out of the Sprint PCS (PCS) balloon.

Big telco parent

Sprint

(FON)

kept investors on hold Tuesday, saying it would wait till tomorrow to discuss its big strategic plans. But word that its wireless business will lose more customers this year left investors wincing.

Shares of Sprint PCS dipped 2.3% after the company posted a drop in average monthly revenue and boosted its projection for subscriber churn. Executives on a conference call said they expected the monthly subscriber-loss rate to increase to 3% from 2.7% as customers increasingly take their phone numbers to other services. PCS slipped 19 cents to $8.05.

The higher defection rate inflames concerns that Sprint will be caught on the wrong side of the wireless industry's revolving-door effect. Wireless number portability rules took effect at the end of November, and since then the divide between wireless service-provider winners and losers has only broadened. Laggards in coverage and service like

Cingular

, a joint venture between

SBC

(SBC)

and

BellSouth

(BLS)

, and

AT&T Wireless

(AWE)

have been burned by higher churn. Meanwhile, industry leaders

Nextel

(NXTL)

and

Verizon Wireless

have surged ahead.

Given that some companies spend more than $400 to acquire each new subscriber, retaining those customers long enough to cover the initial investment becomes a key challenge.

The good news for Sprint is that churn held steady in the fourth quarter, during the first weeks of the number portability rules. The No. 4 cell phone service also saw its reseller partner

Virgin Mobile

add 1.4 million subscribers to its network.

On Wednesday, the Overland Park, Kan., telco will host an analyst day where it is expected to outline cost-cutting outsourcing plans, a new capital spending budget and an update on just when the company will recombine the two stocks. Sprint FON stock represents the telco's landline business and Sprint PCS stock tracks the performance of its wireless business.

Sprint executives have said they intend to pull in the tracking stock, but only when the move is beneficial to shareholders. To some observers, that's probably around the time when the red ink at its wireless business turns to black.

"I wouldn't be surprised if they said tomorrow that this is the year when we have to do it, but it is still going to be dilutive to FON shareholders," says Jefferies & Co. analyst Rick Klugman.

For the fourth quarter ended Dec. 31, Sprint posted a profit of $38 million on revenue of $6.68 billion. That's down from the year-ago profit of $39 million, but up from year-ago revenue of $6.54 billion.

Sprint FON group posted earnings of $360 million, or 40 cents a share, on revenue of $3.54 billion. Adjusted earnings, excluding certain items, were 39 cents a share. That's 2 cents above the year-ago figure and above the Thomson analyst estimate. FON Group revenue fell 4% from a year ago and was flat with the third quarter.

Sprint PCS similarly beat Wall Street estimates by 2 cents, posting a 10-cent-a-share adjusted loss on $3.3 billion in revenue. On a bottom-line basis, Sprint PCS lost 31 cents a share.

The PCS group added over a million net customers in the fourth quarter, consisting of 390,000 net direct customer additions combined with 640,000 from wholesale and affiliate partners. The PCS group, through all channels, was serving a total of 20.4 million customers at the end of the year, an increase of more than 2.6 million, or 15%, from a year ago, Sprint said.