Sprint still eyes consolidation as it posts smaller loss

NEW YORK Wed Feb 12, 2014 12:58am IST

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NEW YORK (Reuters) - Sprint Corp (S.N) Chief Executive Dan Hesse reiterated his call for consolidation in the U.S. wireless market on Tuesday after the No. 3 U.S. mobile operator reported a smaller fourth-quarter loss and subscriber growth that was helped by tablet sales.

Sprint, which is 80 percent owned by Japan's SoftBank Corp (9984.T), has been eyeing a deal with smaller rival T-Mobile US (TMUS.N) in order to compete better with market leaders Verizon Wireless (VZ.N)(VOD.L) and AT&T Inc (T.N).

Hesse declined to comment specifically on the possibility of such a deal during Sprint's quarterly earnings call, but took questions about intensifying industry competition.

The executive repeated his argument that the creation of stronger competitors would be good for consumers, with his comments coming just days after U.S. regulators expressed skepticism about the effect a Sprint/T-Mobile union would have on competition.

"I believe that further consolidation in the U.S. wireless industry outside of the big two - AT&T and Verizon because they're so large - would be healthy for the competitive dynamic of the industry, would be better for the country and better for consumers," Hesse said.

Analysts say his case is being hurt by a recent surge in consumer promotions led by long-time market laggard T-Mobile, which has provoked price discounts from AT&T. Regulators blocked AT&T's effort to buy T-Mobile in 2011 to protect competition.

Hesse said T-Mobile's offer in early January to pay customers who switch to its service was influencing consumer decisions in its first few weeks.

"A offer that's that rich is going to have an impact on the market," Hesse told Reuters in an interview, adding that he hopes he hopes the effect of the promotion will "taper off over time."

But the executive said: "It's hard to speculate what will happen in the future out of this."

MORE CHURN EXPECTED

Despite tough competition in the fourth quarter Sprint said it added 58,000 net subscribers compared with analyst expectations for subscriber losses. But the improvement from a third-quarter loss of 360,000 subscribers was largely due to tablet computer sales according to Sprint, which had previously depended almost completely on phone subscribers.

While the better-than-expected subscriber numbers boosted Sprint shares, investors were less excited to hear about how much of the growth was based on the table subscriptions, which bring in less revenue for Sprint than smartphone sales.

Sprint shares gave back some of their gains in the afternoon after rising as much as 8 percent in morning trade.

"The headline numbers look very strong but when you start to go through it you see that was tablet sales to existing customers rather than new phone sales," said Credit Suisse analyst Joseph Mastrogiovanni who noted that phone customers typically bring in a lot more service revenue than tablets.

Tablet sales also helped to explain Sprint's better-than-expected profit in the quarter because those sales are accounted for in a different way than smartphone subscriptions, according to Mastrogiovanni.

Also, Sprint's growth was still minuscule in comparison to its rivals. Sprint has been losing customers due to a shutdown of one network and a massive overhaul of its remaining network which is degrading the quality of its phone calls.

Sprint executives also said the No. 3 U.S. mobile provider would see overall subscriber losses and a high rate of customer defections, known as churn, for the first half of the year, as it continues the network upgrade.

"During the construction phase, there is a period of disruption to our network service which manifests itself in higher voice service drops and blocked calls," Hesse told analysts. "Voice performance is very noticeable to customers so heightened blocks and drops contribute significantly to churn."

Sprint expects a gradual improvement in churn and a return to subscriber growth for the second half of the year.

LOSS NARROWS

Sprint said its loss narrowed to $1.04 billion, or 26 cents per share, in the fourth quarter, from $1.32 billion, or 44 cents per share, in the year-ago quarter.

The quarterly loss per share was much narrower than the average expectation for a loss of 33 cents per share according to Thomson Reuters I/B/E/S.

The company said it was helped by savings from the closure of its older Nextel network in the middle of 2013.

Revenue rose to $9.14 billion from $9.01 billion. The average analyst estimate was $8.97 billion, according to Thomson Reuters I/B/E/S.

It forecast 2014 adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) at between $6.5 billion and $6.7 billion, and capital spending of about $8 billion.

Sprint shares were up 3.5 percent or 27 cents at $7.97 in afternoon trade on the New York Stock Exchange after rising as high as $8.32 earlier in the session. Its shares have lost roughly a quarter of their value since the beginning of 2014 as investor hopes for a Sprint/T-Mobile deal have dwindled.

(Editing by Jeffrey Benkoe, Chizu Nomiyama, James Dalgleish and Meredith Mazzilli)

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