Bloomberg News

Sprint May Take ‘Big Hit’ With Bet on IPhone to Add Users

October 05, 2011

(Updates share prices in final paragraph.)

Oct. 5 (Bloomberg) -- Sprint Nextel Corp.’s plan to offer Apple Inc.’s iPhone may slash its operating margins almost in half if enough people activate new phones, analysts said.

Sprint, which has lost money for 15 consecutive quarters, could see quarterly operating margins drop to 9 percent from the 16 percent reported because activations of each iPhone might cost the company up to $150 more than a typical smartphone, said James Ratcliffe, an analyst with Barclays Capital in New York. John Hodulik, an analyst with UBS AG, said fourth-quarter margins could be between 9.8 percent and 11.5 percent, depending how much Sprint subsidizes the devices.

“Is it better for Sprint to have the iPhone? Absolutely,” Ratcliffe said in an interview Oct. 3. “But in the short term they’re going to take a hit.” He rates the company “equal weight/neutral.”

Sprint, the third-biggest U.S. wireless operator, will begin selling the iPhone 4S on Oct. 14 along with larger competitors AT&T Corp. and Verizon Wireless. The iPhone 4S uses two antennas to improve call quality and a processor that is seven times faster than the chip in the previous phone, Apple said yesterday at a press conference at its headquarters in Cupertino, California.

“They will benefit from improved retention of their customers and a high level of customer upgrades,” said Michael Nelson, an analyst with Mizuho Securities USA Inc. in New York, who expects Sprint will sell about 1 million iPhones in the fourth quarter. He rates the shares a “buy.”

AT&T, Verizon

Sprint has been struggling to compete against AT&T and Verizon, the two largest U.S. wireless operators, which both already offer the Apple device. The Overland Park, Kansas-based company in July reported a decline in contract customers that was larger than some analysts had estimated. Lack of the iPhone has been the top reason customers choose other carriers, Chief Executive Officer Dan Hesse told investors last month.

Bill White, a Sprint spokesman, said the company will discuss the financial impact of the iPhone Oct. 7, when the company will update investors on plans to roll out a 4G network.

The company has committed to buy at least 30.5 million iPhones over four years, which would cost $20 billion at current rates, the Wall Street Journal reported Oct. 3. Sprint has already pledged to spend $5 billion over three to five years to upgrade its wireless network.

214,000 New Subscribers

Verizon Wireless, which is majority owned by Verizon Communications Inc., added the iPhone in February after almost four years of exclusivity by AT&T, the second-largest U.S. wireless company. In the second quarter, the first full quarter with two iPhone carriers, AT&T activated 3.6 million of the devices, while Verizon, the largest wireless carrier, activated 2.3 million.

Sprint may add 214,000 new contract subscribers this year with the iPhone, compared with 855,000 customers it lost last year, said Hodulik, who rates the shares “neutral.” He estimates Sprint will sell 1.2 million iPhones in the fourth quarter, with about 25 percent of those coming from other carriers.

Carriers sell phones at a discount with the expectation that they will recoup the money through monthly bills during service contracts. Each iPhone 4S costs the carriers about $600, Hodulik said, speaking in a telephone interview Oct. 3. Sprint is expected to offer it with an unlimited two-year contract priced below its competitors’ offers.

AT&T ‘Big Winner’

“It’s a big hit for the next couple of quarters, but it’s the cost of doing business,” said Todd Rethemeier, an analyst at Hudson Square Research in New York, who has a “buy” rating on the shares. “AT&T gained a lot of market share by being an iPhone provider, and this will give Sprint the chance to gain back some of those customers.”

Apple has optimized the iPhone 4S so that it can connect to AT&T’s network at theoretically twice the data speed of the previous version of the phone, Philip Schiller, Apple’s vice president of product marketing, said during the presentation.

“The big winner on this phone is AT&T because the data speeds are now twice as fast,” said Roger Entner, a wireless strategist with Boston-based Recon Analytics. For the so-called CDMA or code division multiple access network operated by Verizon and Sprint, there’s no comparable speed jump. “This is a medium-sized win for Sprint.”

Sprint will offer the phone with unlimited data service to distinguish itself from AT&T and Verizon Wireless, people familiar with the matter have said. That could draw customers away from the other carriers, who stopped offering unlimited plans, Rethemeier said.

Sprint was unchanged at $2.86 at 4 p.m. in New York Stock Exchange composite trading. The shares are down 32 percent this year. AT&T rose 43 cents, or 1.5 percent, to $28.31, while Verizon Communications slipped 13 cents to $35.77.

--Editors: Niamh Ring, Romaine Bostick

To contact the reporter on this story: Sarah Frier in New York at sfrier1@bloomberg.net; 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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