Sprint: 1.8 Million iPhones Exceed Q4 Expectations

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Overland Park, Kan. - Sprint's activation of 1.8 million iPhones in the fourth quarter exceeded company expectations despite "unusual" iPhone discounting by AT&T and Verizon, Sprint CEO Dan Hesse said in releasing fourth-quarter financial results.

The iPhone 4S

The carrier also reported its best quarterly increase in six years in net new subscribers, with the number of net new subscribers rising 26.6 percent from the year-ago period to 1.62 million. That gain, which is the seventh consecutive quarterly gain following years of subscriber losses, expanded the company's year-end subscriber base to a record 55 million, up 10.3 percent from year-end 2010.

At 5.1 million, the number of net new subscribers for the full year was the biggest since 2001 and was up substantially from 2010's 1.78 million.

Despite the subscriber gains and a 7.6 percent increase in wireless revenues to $7.92 billion for the quarter, Sprint's wireless operations posted a fourth-quarter net operating loss of $500 million, up from a year-ago loss of $267 million and in contrast to a third-quarter operating profit of $131 million. For the year, wireless operating losses shrank to $256 million from 2010's loss of $1.23 billion.

During the quarter, Sprint chose not to participate in "unprecedented" discounting of iPhones and other handsets despite what Hesse called a level of handset discounting that was "unusual, even by traditional seasonality history." iPhones were discounted by $30 or more, and some 4G LTE phones were sold "at very low rates," he said.

Though iPhone activations exceeded Sprint's expectations, Sprint's iPhone activations in the quarter were significantly below Verizon's 4.3 million iPhone activations and AT&T's 7.6 million. Some of the difference can be traced Sprint's October 14 launch of the iPhone, whereas AT&T and Verizon had been selling iPhones throughout the quarter.

In other fourth-quarter sales metrics, the carrier said 86 percent of phones activated on the Sprint network by retail postpaid subscribers were smartphones, boosting the number of postpaid subscribers using smartphones to 66 percent. In contrast, 56.8 percent of AT&T's retail postpaid subscribers were using smartphones at the end of the year, and 44 percent of Verizon's retail postpaid subscribers were.

The costs of subsidizing iPhone sales and costs of acquiring iPhone subscribers was around $630 million during the quarter, the company said. iPhone costs and the $54 million in costs to revamp Sprint's network infrastructure reduced the quarter's OIBDA margin by an estimated 8.8 percent points to a reported 10.8 percent, the company said.

The costs of selling iPhones and meeting Sprint's volume commitment to Apple will be more than offset by iPhones' network efficiency, the ability to attract new subscribers, expected lower churn rates among iPhone subscribers, and lower calls to customer care, said Hesse. Forty percent of activated iPhones went to subscribers new to the Sprint network, he noted.

Sprint previously said it pledged to buy a minimum of $15.5 billion worth of iPhones over four years.

In announcing other financial results, Sprint said its wireline and wireless networks combined posted a net loss of $1.3 billion, up from the year-ago loss of $929 million, but for the full year, consolidated net losses fell to $2.89 billion from $3.47 billion.

However, with wireless' annual operating losses shrinking, Hesse said Sprint's wireless turnaround is entering a second phase in which the company is investing for future growth.

He pointed to gains in multiple metrics, such as the seventh consecutive quarter of net new postpaid subscribers on the Sprint network to 539,000, compared with a year-ago 453,000, and a full-year gain of 1.28 million compared with 2010's 734,000 gain. The number of subscribers of the 2G iDEN network, which Sprint will begin to shut down this year, continued to lose subscribers at a rate of 770,000 for the quarter and 3.16 million for the year.

In its Sprint-network prepaid subscriber base, the carrier posed a net gain of 899,000 compared with the year-ago gain of 1.41 million, but for the year, Sprint-network prepaid net adds hit 2.7 million, up from 2010's 994,000.

In other comments, Sprint executives said it will light up two more markets with 4G LTE and improved 3G service in mid-2012 than previously announced. The two new markets, Kansas City and Baltimore, will join Houston, Dallas, San Antonio and Atlanta. Three 4G LTE devices will be available for the launches.

The executives also noted that since mid-2011, Sprint has been selling CDMA phones that not only operate in Sprint's 1900MHz band but also in the lower 800MHz band to take advantage of that spectrum when iDEN cell sites are taken off-line. Those CDMA phones will benefit from an immediate improvement in service when CDMA is implemented at 800MHz, the company said.

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