Sprint: The iPhone Effect
The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) --
Sprint
(S) - Get Report
announced its results for the fourth quarter of 2011 on Wednesday. The stock took a hit as the company posted a net loss of $1.3 billion, its largest quarterly loss in three years. The iPhone ate away at its margins. However, the iPhone also helped the carrier add 161,000 net postpaid subscribers during the quarter, ending a run of three consecutive quarters of net postpaid losses in 2011, a strong improvement over the 58,000 net additions in the fourth quarter of 2010.
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Sprint started offering the iPhone on its network at the start of the fourth quarter, becoming the third carrier in the U.S. to offer the device after
AT&T
(T) - Get Report
and
Verizon
(VZ) - Get Report
.See our full analysis of
Sprint's stock here.
Net Postpaid Gain for the First Time in 2011
Sprint's fourth-quarter earnings were in stark contrast to the previous quarter, when the company posted solid earnings but continued to lose postpaid subscribers. This time, although the company did post net postpaid additions for the quarter, the number fell short of management's expectations.
CEO Dan Hesse attributed this to significant discounting in the market, in which Sprint declined to participate. It is important for Sprint to make the iPhone count, considering that it has made a huge $15.5 billion upfront commitment to buy iPhones from Apple over the next four years. It's not a good sign that the company was unable to meet its own guidance on the iPhone front.
However, it's still early for Sprint and the iPhone, and the company has had a relatively good start, given that a majority of postpaid churn came from Nextel's legacy iDen network. We expect this trend to continue, or even accelerate throughout 2012, as Sprint starts to decommission the network.
Data ARPU to Rise Over the Long Term
Although the iPhone helped Sprint post a net gain in postpaid subscribers, 40% of whom were new to Sprint's network, the 1.8 million iPhones Sprint had to subsidize in the process cost it almost $630 million, or about $350 per phone. This brought the company's OIBDA margins down to 10.8%, compared to 18.2% in the third quarter.
In return for the subsidy, however, Sprint has locked in these customers to a long-term contract for its postpaid plans. So we expect the subsidies to pay off in the longer term as they ensure long-term patronage for Sprint's higher margin postpaid data plans, thereby reducing churn and bringing in steady cash flows. iPhone users are typically heavy data users as well, which means that the average data revenues generated per user will also increase.
Sprint's capital expenditures continued to escalate in the fourth quarter, to $900 million compared to $760 million in the third quarter and $608 million in the fourth quarter of 2010. We expect this trend to continue throughout 2012, as the company focuses on its network modernization project and improving data capacity, following the iPhone launch. Sprint expects to launch its 4G LTE service in six major cities by mid-2012.
We are in the process of updating our price estimate for Sprint's stock to reflect its fourth-quarter earnings, 2012 outlook and other factors.
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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.
