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Sprint’s Widening Loss Signals IPhone Not Helping Turnaround

Sprint Nextel Corp. (S) reported widening losses for the first quarter it offered the Apple Inc. (AAPL) iPhone, signaling the best-selling device may not be helping Chief Executive Officer Dan Hesse turn around the carrier’s business.

Sprint sold 1.8 million iPhones last quarter, fewer than some analysts projected and trailing larger rivals AT&T Inc. (T) and Verizon Wireless. The device also ate into Sprint’s margins by boosting its subsidy expenses by about 40 percent. Sprint and competitors sell the device at a loss to get consumers to sign up for multiyear contracts.

“With the addition of the iPhone in the fourth quarter, Sprint joined Verizon and AT&T in becoming a victim of Apple’s success,” Craig Moffett, an analyst at Sanford C. Bernstein & Co. in New York, said today in a note to clients. He rates Sprint shares “market perform.”

While the iPhone increased costs, it wasn’t enough to help Hesse deliver on his promise to reverse a five-year decline in contract subscribers for Overland Park, Kansas-based Sprint. Hesse, who is banking on the device to win subscribers from AT&T and Verizon Wireless and to get existing ones to spend more, declined to offer a customer-growth forecast for 2012.

Hesse did forecast service revenue growth of 4 percent to 6 percent for 2012, in line with analysts’ estimates. He also said he expects the next iPhone edition to arrive around October, as it did last year, and that the new version is “in our guidance.”

Sprint fell 1.6 percent at $2.41 at the close in New York. It lost 45 percent last year, while Verizon and AT&T rose.

‘Good Decision’

UBS AG predicted Sprint would sell 1.9 million iPhones. Verizon Wireless, the biggest U.S. wireless carrier, sold 4.3 million iPhones last quarter and AT&T activated 7.6 million of the devices.

“Sprint was the only operator in the U.S. in which the iPhone represented less than half of smartphone sales,” said Walt Piecyk, an analyst with BTIG LLC.

Since the 2007 arrival of the iPhone at AT&T, Sprint has been losing contract customers, who are lucrative because they spend more each month than so-called prepaid users. In the past five years, Sprint has lost 8.8 million, or 21 percent, of its contract subscribers, while AT&T has gained 39 percent and Verizon Wireless increased by 60 percent, according to data compiled by Bloomberg.

Hesse said that while this was just the first quarter of iPhone sales, he was confident of its benefits.

“Going with the iPhone was a good decision for a variety of reasons,” said Hesse in a phone interview. For example, he said, “40 percent of iPhone buyers were new customers to Sprint.”

Money to Cupertino

The iPhone helped boost Sprint’s subsidy expenses to about $1.7 billion from about $1.2 billion a year earlier. The device from Cupertino, California-Apple carries higher subsidy cost than other handsets, Sprint said. Hesse said he expects the payback to come in the form of lower customer churn and higher average revenue per user, or ARPU.

In the fourth quarter, the monthly ARPU for contract customers climbed to $58.59, while the churn for such users increased to 1.98 percent. Sprint’s net loss widened to $1.3 billion, or 43 cents a share, from $929 million, or 31 cents, a year earlier.

“The financials are weak due to the amount of money they are sending to Cupertino,” James Ratcliffe, an analyst at Barclays Capital, said before the report. “This year and next are going to be unattractive financially. I think people who own Sprint might be looking more toward the prospects in 2014.”

Hesse said one of the main benefits for the iPhone is that it brings Sprint on the same line with competitors. Dallas-based AT&T and New York-based Verizon Communications Inc. (VZ), the parent of Verizon Wireless, both also posted fourth-quarter losses because of iPhone subsidy costs and one-time items. Apple’s net income of $13.1 billion for the period ranked among the highest quarterly profits on record.

“What’s been great since we’ve had the iPhone, is that they have always been on the other team,” Hesse said. “Now they are on our team and that’s a great feeling. We earned the right to carry the iPhone and I’m glad that we did.”

To contact the reporter on this story: Scott Moritz in New York at smoritz6@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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