Palm Pre Cannot Rescue Sprint from Second-Quarter Loss

 
 
By Michelle Maisto  |  Posted 2009-07-29
 
 
 

Palm Pre Cannot Rescue Sprint from Second-Quarter Loss


The Palm Pre proved to be a hit for Sprint Nextel, but it couldn't stop the carrier from losing a quarter of a million customers during the second quarter of 2009.
 
On July 29, Sprint announced consolidated net operating revenues of $8.1 billion for the second quarter-compared with $9.05 billion a year earlier-along with a net loss of $384 million and a diluted loss per share of 13 cents.
 
Additionally, customer numbers fell from 49.1 million at the end of the first quarter of 2009 to 48.8 million at the end of the second.
 
"As I prepared my comments for this earnings call, one observation was clear: Sprint is not the same company it was 12 months ago," Sprint CEO Dan Hesse told investors and analysts during the earnings conference call.
 
"During prior quarters our focus on operating improvements and efficiencies enabled Sprint to stabilize our earnings trend, and during the second quarter we saw a sequential improvement in adjusted OIBDA [operating income before deprecation and amortization]," said Hesse.

"We continue to generate strong free cash flow during the quarter, resulting in a cumulative free cash flow production of almost $1.5 billion during the first half of 2009."
 
Hesse later said that the Palm Pre was the most successful launch in Sprint's history, in part thanks to the training it gave employees, and that the Pre helped soften the impact of the arrival of the iPhone 3GS on competitor AT&T.
 
"When there's a new device launched, say the iPhone in particular, you'll see a blip for a period of time, in increased churn," said Hesse.
 
"But we think that, just like a year ago, when the [Samsung] Instinct helped to mitigate the impact of that significantly, this year we had the Palm Pre, which mitigated that as well. I don't want to lead you to believe that there's no impact at all from the iPhone-it is a successful device. But I think we've mitigated the impact significantly with a strong device lineup."
 
Exclusivity agreements between manufacturers and carriers have come under scrutiny lately, most especially regarding AT&T's relationship with the iPhone and Sprint's with the Palm Pre-which will be much shorter lived than the former's.
 
"We are the exclusive provider of the device into 2010," Hesse said. "And we have no more to say other than that."
 
Along with Keith Cowan, Sprint's president of strategic planning and corporate initiatives, Hesse detailed the ways they're working to turn the ailing carrier around, including vast improvements to customer service, excellent 3G capabilities, a strong handset lineup, an early launch of 4G services and also its recent acquisition of Virgin Mobile, which offers prepaid services.
 
Sprint has struggled to retain postpaid subscribers, but its prepaid service, Boost Mobile, has been a particular area of strength.
 
"The company's prepaid division has been adding a significant amount of subscribers since the introduction of the unlimited $50 Boost prepaid plan, partially offsetting postpaid subscriber losses," Kate Price, an analyst with Technology Business Research, told eWEEK.  
 
"Prepaid ARPU also increased $3 sequentially to $34, with the $50 unlimited plan being the catalyst of the growth. Though the prepaid division is a small segment of the company, it was the only segment to post revenue growth, and will likely remain a focus for the company moving forward," Price continued. "The company's purchase of Virgin Mobile also indicated prepaid will likely receive increased focus from the company."

Turning Around Public Perception


 

Turning Around Public Perception
 
Sprint's Hesse also described the challenges of turning around public perception to meet the new realities of the company, particularly in an ailing economy, and given that Sprint has two networks-iDEN and CDMA-and two customer bases.
 
Addressing the decline in subscribers that Sprint has faced over the last three years, Hesse explained, "A big element of that has been the hit the brand took in 2006, 2007, when we did have some service issues, and we've improved that."
 
He continued, "It takes awhile, when that happens, for perception to catch up to reality. There are no quick fixes, if you will. You'll see gradual improvement. ... We're working on all fronts. But there are no silver bullets. It is customer experience, it is new handsets, it is 4G. We're hoping that we'll begin to see that move up."
 
In addition to the Pre and the Samsung Instinct s30, Sprint exclusively offered the Sanyo SCP-2700. It began offering the BlackBerry Tour on July 13, and in the quarter added the Novatel Wireless MiFi 2200 mobile hot spot to its lineup, along with the Samsung Exclaim, the HTC Snap and the CapTel 800i for hard-of-hearing users.
 
Sprint is also the network provider for Amazon's Kindle and Kindle DX.
 
"I think that's Sprint in the unenviable position of trying to transform itself in a difficult market," analyst Charles King with Pund-IT, told eWEEK.
 
"And in a market as cut-throat and difficult as the mobile phone business, when a company gets a reputation for bad service, it takes an awfully long time to convince people otherwise."
 
King acknowledges that Hesse is working hard, and some of the results of this have yet to show. He describes the Pre as "still ramping up" and the Amazon Kindle as having, as yet, still very limited commercial appeal.
 
"But it's great to have those products on board-any one of them, over time, should deliver some benefits to Sprint," said King, adding the Sprint had also recently outsourced the operation of its wireless network, which could free it from some expenses.
 
To a list of the ways Sprint is working hard to become a new company, Hesse would surely add its push to 4G, which has already been encouraged through the Mi-Fi router, which works with dual-mode 3G/4G phones.
 
"We're announcing a number of markets that will launch 4G at the end of the summer, and a bunch more that will launch during 2009, and then of course we'll launch a lot more in 2010," said Hesse.
 
"We believe that being the only player in the market with 4G, and the distinct capabilities of that-and it's not just the new devices that are required to operate on 4G, but with the mobile hot spot, or any device that has Wi-Fi built in, and there's, as I mentioned, 425 million of them, which can become mobile 4G devices immediately. ... We think 4G will be a very significant differentiator for Sprint going forward."
 
It's fair to say, said Pund-IT's King, "that Sprint is doing everything that it can to reverse the direction the company had been on prior to this. ...  They realized they needed to make some serious changes, add compelling products, get out from under some heavy expenses, and they're working hard to do all those things."
 
King continued, "I don't think anyone is ready to dance in the aisles at this particular point. But they recognize their problems, and they're doing what they can to fix them."   

 


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