Subscribers Run from Sprint while T-Mobile Meets Trend as Net Additions Fall in Q2

With the release of results from Sprint and T-Mobile completing the roster of 'national' carriers, together with results from significant regional carrier US Cellular and rapidly expanding low-cost operators Leap Wireless and MetroPCS, Global Insight examines the state of the market with a focus on performance at troubled Sprint Nextel.

Privately held Alltel, currently in the process of being acquired by Verizon, is the only significant facilities-based carrier yet to release data, but reported strong results in the first quarter with internal net additions rising by 50% year-on-year (y/y) to 342,684 to take the subscriber count up 8.13% y/y to 12.8 million (see United States: 24 July 2008: Verizon Offers to Divest 85 Markets for Alltel Merger and 6 June 2008: Verizon Confirms Alltel Acquisition for US$28.1 bil. and 21 March 2008: Privatisation Costs Hit Alltel).

Top-Line Results

Financial Performance

Operational Performance

Outlook and Implications

Race for the Top

Verizon once again topped AT&T in the race for the title of largest carrier by revenues in the second quarter, having briefly lost its stake to this claim. AT&T's higher growth is helped by the closure of the Dobson acquisition in the third quarter of 2007. However, Verizon has just announced that it has concluded the acquisition of Rural Cellular, which should provide a (smaller) boost in the third quarter, and is set to take over Alltel in the next year, which, with around 13 million new subscribers, will power Verizon well ahead of AT&T (see United States: 16 November 2007: AT&T Completes US$2.8 bil. Dobson Acquisition; 25 January 2007: Dobson Acquisition Helps AT&T Break 70 mil. Wireless Subscribers in Strong Q4; 13 May 2008: Running Backwards: Sprint Trails in Q1 Results; and United States: 5 August 2008: FCC Approves Merger of Verizon and Rural Cellular). Verizon continues to milk higher levels of income from operations, raising the already leading figure of US$3.0 billion by 15.1% to US$3.5 billion to maintain a lead in profitability over AT&T's rapid advances in this respect. AT&T continued to reap the benefits of its consolidation from the acquisition of Bellsouth at the close of 2006, which has helped it to enter a strong cash-generating phase and push profitability levels towards those of Verizon Wireless. It should be noted that Verizon Wireless is 45% owned by Vodafone, a stake that the parent company has clearly indicated it would like to re-take, while AT&T is now fully consolidated.

Net Additions—Growth from Below and At the Top

The shrink in net additions can largely be ascribed to losses by Sprint, although there is some evidence of a general softening in growth rates. T-Mobile is the smallest of the 'national' carriers and has put in an impressive subscriber growth of 17.2% y/y, but the drop in net additions reflects what appears to be the national trend, with this key growth metric running some 31.5% lower than the previous year. Verizon has done well to improve what was already an impressive net additions rate, up 12.3% y/y to break the 1.5-million mark for the quarter. AT&T failed to meet the challenge, but the release of the 3G iPhone may have held back some new subscribers to give an expected bump to net additions in the third quarter. While the small, low-cost carriers Leap Wireless and MetroPCS have managed to buck the trends and maintain good growth rates, this is in part due to their rapid expansion programmes with ongoing launches in new metropolitan markets. While the main carriers have started to meet the challenge laid down by these carriers with unlimited use tariffs at nearly twice the price, but with more comprehensive coverage, they still compete for different market segments (see United States: 29 February 2008: Sprint Goes All In for US$99 per Month as Revenues Continue to Decline and US$30 bil. is Written Off).

Sprint Still Sick

Sprint is the obvious loser, dropping nearly 4% of its subscribers in the last year and recording net losses of 901,000 in the quarter. This is slightly down on the first quarter when it topped 1 million, but represents a heavy loss in a market seeing growth of 9.2% (based on these seven carriers).

The key cause of this attrition continues to be the valuable post-paid subscriber base, although all segments are seeing pressure, with the formerly strong wholesale segment continuing to lose subscribers. Key customers, such as Qwest and potentially even former wireline unit EmbarQ, have defected (see United States: 31 July 2008: Qwest Launches Verizon Wireless Sales and Says Goodbye to Sprint and 15 May 2008: Now EmbarQ to Drop Sprint Resale). The nation's second-largest MVNO, Virgin, in which Sprint has a stake, has been finding it difficult to attract new customers, while other MVNO operations have gone to the wall or consolidated (see United States: 30 June 2008: Virgin Acquires Helio for US$39 mil.).

Sprint Retracts Cash Call

On Wednesday (6 August), Sprint announced that it would sell US$3 billion in convertible stock, before retracting the placement the next day citing unattractive terms given current unfavourable market conditions. Net losses ran at US$344 million for the quarter and, although cash and equivalents stand at US$3.5 billion, Sprint has acted to decrease investment liabilities, such as the Clearwire/Xohm WiMAX network deployment, which is set for a spin-off, and offloaded some of its tower portfolio (see United States: 8 May 2008: Sprint Confirms Details of WiMAX Joint Venture and 24 July 2008: Sprint Offloads 3,300 Towers for US$670 mil.). However, Sprint has also significantly lowered its capital expenditure, which fell from US$1.66 billion to US$646 million, while the wireless segment sank capex from US$1.37 billion to US$393 million—this is likely the major client loss that hit Alcatel-Lucent's CDMA revenues (see World: 29 July 2008: Alcatel-Lucent CEO and Chairman Go). This could cause problems if reductions in budget impact on network quality, which has already had notable issues,to which many of the subscriber losses have been attributed.

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