Sprint Takes Low Road to Recovery Via Prepaid Users, Tablets

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Sprint Corp.’s recovery route is heading down market, relying on tablet promotions and prepaid bargain plans to compensate for the loss of the more lucrative monthly subscribers in an industry where growth is drying up.

Sprint posted a surprising gain of 170,000 monthly subscribers in the quarter ended in March. Behind that number was a loss of 201,000 branded monthly phone customers, offset by the addition of 349,000 Sprint tablet subscribers and 546,000 pay-as-you-go users. The bargain hunters not only salvaged growth for a second quarter, they enabled Sprint to cling to its No. 3 ranking ahead of challenger T-Mobile US Inc.

Sprint joins industry leaders Verizon Communications Inc. and AT&T Inc. in pushing tablets to mask weaker phone sales. Sprint’s prepaid additions were so high last quarter that they surpassed those of AT&T, Verizon and T-Mobile combined. But those customers aren’t the quality substitute for so-called post-paid phone subscribers -- the types of loyal users that add family members and bigger data allotments to the monthly service plan.

“Post-paid customers stay on the network longer and pay more per month,” said Walt Piecyk, an analyst at BTIG LLC who recommends selling Sprint’s stock. “Sprint is not growing its post-paid phone base.”

Sprint Chief Executive Officer Marcelo Claure says one step at a time. Going from a seven years of losing millions of customers to two straight quarters of gains means the turnaround is working, Claure said in an interview.

“The fact that we are adding customers means the combination of network and value works,” Claure said. “The difference between networks is getting smaller and smaller, and in many markets our network is better.”

Proving Legere Wrong

For the second quarter in a row, T-Mobile Chief Executive Officer John Legere had predicted his company would beat Sprint in the rankings as No. 3 mobile carrier. And for the second time, Sprint proved Legere wrong.

“He has to wait until all the results are out before he makes these judgments,” Claure said about Legere. “He has to be more careful when he makes predictions.”

The fight for the No. 3 spot will go on, with Sprint at 57.1 million and T-Mobile at 56.8 million. Legere has questioned the number of inactive customers Sprint carries on its wholesale user count.

“We feel that T-Mobile is larger than Sprint if they reported like everyone else, but again -- if you don’t want to compare apples to apples, it is still a matter of ‘when’ not ‘if,’” T-Mobile said in e-mail Tuesday.

Sprint shares fell 3.1 percent to $4.99 at the close in New York. The stock has gained 20 percent this year, while T-Mobile rose 25 percent.

Cash Burn

Claure was hired in August by SoftBank Corp. President Masayoshi Son to turn Sprint around. After cutting more than 2,000 employees, lowering prices below rivals and more than doubling the carrier’s retail store count, Claure said he is “on the right trajectory.”

Time might not be on Claure’s side, Craig Moffett, an analyst at MoffettNathanson LLC, wrote in a note today.

Sprint’s turnaround plan is reducing its cash supply at an alarming rate -- $914 million in the fiscal fourth quarter, Moffett wrote.

“Sprint is to be lauded for the improvement in subscriber trends, but we fear it may come to naught,” said Moffett, who recommends selling the stock. “At the current rate of cash burn, the company will run out of cash in a year.”

Claure said he’s confident in the company’s finances and that there is $7 billion in available funding.

“I like where we are going,” Claure said. “We are still far from being the company we want to be, but today this is a different company than it was three months ago, and a different company than what we had six months ago.”

(Updates with closing share price in 11th paragraph.)
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