It seems Sprint’s bottom of the barrel offers paid off in subscriber numbers but not profits.
Sprint posted record low postpaid churn and 1.1 million total net additions during its quarterly earnings report on Tuesday, nearly doubling its net add total year over year. Postpaid churn stood at 1.54 percent, the lowest churn figure in the company’s 20-year history.
The report marked the first time in nearly two years Sprint has seen positive postpaid phone net additions for the quarter and extended the carrier’s streak of postpaid phone net adds to six months.
“As seen in our quarterly results, American consumers are happy to switch to Sprint because they appreciate great products and great service at a great price,” Sprint CEO Marcelo Claure said in a statement. “This quarter marked an inflection point in our turnaround journey, as we achieved positive postpaid phone net additions for the first time in over two years. In addition, we set another record low for postpaid churn and improved sequentially in the September quarter, something no U.S. carrier has ever done before.”
According to Claure, several factors contributed to Sprint’s churn and net add success this quarter, including a new pricing strategy, a focus on quality customer growth over quantity and the introduction of the iPhone Forever device lease program.
Claure said Sprint’s new plan offerings, including its $40 1 GB plan and $70 unlimited plan, cover the market spectrum while still offering customers the value they seek. Despite raising the price of its unlimited plan from $50 to $70, Claure said the company has not seen demand for that service fall during the quarter. Claure said the company remained “incredibly disciplined” in how it sets its prices, but noted a three percent increase in average billing per account and a two percent increase in average billing per user.
Claure said the carrier also managed to increase gross additions despite the rollout of stricter credit guidelines. Claure said the higher standards will improve the quality of Sprint’s customer base and result in a continued improvement in its churn. Overall, Claure said the company was on a trajectory to continue improving net adds each month.
According to Claure, the company is in the process of phasing out subsidies in favor of device leases, such as the carrier’s successful iPhone Forever program. In the year since it introduced device leasing, Claure said Sprint has reached the point where 50 percent of its sales are now in leases. Claure said device lease programs allow the company to capture the residual value of a device at the end of the lease term, and said lease programs will also help reduce churn.
To capitalize on the opportunities leasing offers, Claure said Sprint is currently working with Softbank to establish a handset leasing company that it expects will help meet the carrier’s cash flow needs. The setup is expected to close in the coming weeks, at which point Sprint will offer more details on the operation, Claure said.
But Sprint isn’t out of the hole yet. During Tuesday’s call, the carrier also reported net operating revenues of $8 billion, for a six percent decrease year over year, and an operating loss of $2 million. Sprint said the dip in operating revenues was caused by customer “shifts to rate plans associated with device financing options and postpaid phone customer losses from prior periods” that drove lower wireless service revenues.
The company also posted a net loss of $585 million for the quarter with a $0.15 loss per share, an improvement over a loss of $765 million and $0.19 per share a year ago.
Sprint said it now expects adjusted EBITDA for the fiscal year 2015 to be at the low end of the previous expectation of $7.2 to $7.6 billion.
Despite these figures, Claure heralded the quarter as a milestone in the company’s turnaround and said the carrier is on the right track to fully execute its turnaround.
A large part of Sprint’s financial success going forward will hinge on more than $2 billion in pending cost reductions, which Sprint CFO Tarek Robbiati said will come from a “fundamental shift” in how the company operates. Claure said the reductions will help the company become a “more nimble competitor” and will help reach the point of free cash load generation.
Claure said the cuts are the second phase of a two-part, multi-faceted approach to repairing the ailing business, the first phase of which was to stop revenue decline. The second phase, Claure said, is a much deeper “attack” on the company’s cost line, which includes a line by line analysis of profits and losses. So far, Claure said Sprint has worked to optimize labor costs, device sourcing and customer care and has reduced service costs by expanding the network to minimize roaming expenses from competitors. Now, Claure said the company is tracking nearly 1,500 different initiatives on a weekly basis to meet its $2 billion or more cost reduction goal.
Though Claure said he understands some are skeptical the company can continue to grow while simultaneously optimizing its business expenses, he said he is confident the carrier can execute both tasks at the same time.
As of 9:40 a.m., Sprint shares were down nearly 6.5 percent on the mixed news.