Sprint(S), the fourth-largest wireless carrier in the United States, is in for a period of cuts as the company reported a larger-than-expected quarterly loss Tuesday.
Net operating revenue fell 6% to $7.98 billion in the quarter ending Sept. 30. The company lost $585 million during that period, or 15 cents per share. Analysts had been expecting the company to post a per-share loss of 9 cents. Because of the quarterly miss, Sprint advised that its adjusted earnings for the year will be at the low end of its expectations.
Sprint also advised that it plans to shed $2 billion in costs by the end of 2016 to stem its losses.
It’s not all bad news for Sprint. The company announced that its postpaid subscriber base is growing again, adding 237,000 phone customers during the last quarter. Postpaid customers, who sign a contract, are significantly more profitable than prepaid customers, who pay their often low-cost plans ahead of time. According to CEO Marcelo Claure, it was Sprint’s first growth quarter for postpaid customers in over two years. However, those customers weren’t exactly new: Sprint converted 199,000 existing prepaid customers to postpaid from brands it owns such as Virgin Mobile and Boost Mobile.
So the number of new postpaid phone customers was more like 38,000.
Sprint is in the middle of a turnaround plan. The SoftBank-owned carrier named Tarek Robbiati to be its CFO and promoted John Saw from chief network officer to chief technology officer last quarter. But the next stage of that turnaround may be more painful.
The Wall Street Journal reported Monday that Sprint’s cuts will include layoffs, in addition to the end of perks like drivers for executives and free snacks in the company’s Overland Park, Kan., headquarters.
“Basically we’re going much deeper and looking at every single line item in the (profit and loss statement),” Claure said on a conference call with analysts. “We’re looking at our labor costs, maybe optimizing labor, we’re looking at our cost of service, we’re spending hundreds of millions of dollars on our competitors in roaming, and as the network gets built out and finished the roaming costs will drop dramatically. We’re looking at how we run our network, we’re looking we source devices, we’re looking to be smart in how we use technology to drive costs down.”
Sprint has been successful in getting its lucrative postpaid customers to sign up to lease their devices, instead of buying them outright or having them subsidized by costs built into a postpaid plan. Fifty-one percent of Sprint devices are on lease, and one advantage for the company is that those phones are eventually returned to Sprint, which means it can make money reselling them. Reselling and refurbishing used devices was a specialty of Brightstar, the company Claure headed before joining Sprint.
Another advantage to leasing: Sprint can shift its lease costs to a third party—in this case, an entity owned by corporate parent SoftBank. Sprint says its leasing vehicle is nearly finalized.
“We like lease economics because it allows us to capture the residual value at the end of the lease. We like to be in the leasing business because with our partner SoftBank, we can finance most of the revenue stream that comes from the lease,” Claure said. “So you can see us being that carrier that is focused on leasing but at the same time offering an option to customers who want to own the device.”
Claure added that Sprint is considering offering a lease-to-own option by the start of next year.
Although Sprint did add postpaid customers this quarter, it’s important to note that the other major carriers, including T-Mobile (TMUS), which passed Sprint to become the third-largest carrier earlier this year, also reported gains. Verizon fortune-stock symbol=”VZ”], for example, added 1.3 million new postpaid customers. Sprint may be able to continue adding customers, especially since the company recently expanded its retail footprint by 1,435 new stores, thanks to a deal to lease RadioShack locations after that company filed for bankruptcy earlier this year.
Still, it looks like Sprint will be in lean mode for the next year as it figures out how to keep costs down. It’s a tricky balance—the wireless market is a zero-sum game, and if the cuts end up affecting network quality, Sprint risks falling farther behind its rivals.
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