Sprint posts a loss: 'We have yet to turn the corner'

The gamble Dan Hesse took when taking the helm of Sprint was to restore value to a brand whose public image had taken a serious pounding. He may be gaining headway in terms of public confidence, but it's at a cost.

The strategy of new Sprint CEO Dan Hesse has been to reconstruct the public image of his company, and to be transparent about the difficulties ahead. It's a commendable strategy, but this morning Hesse found himself paying the price for it anyway, explaining a $326 million net loss for the quarter on 12.2% lower revenue, as having partly derived from decisions he himself made.

"Gross [customer] adds declined again but to a lesser degree than what we have seen in recent quarters," Hesse told analysts during Sprint's quarterly conference call this morning (our thanks to Seeking Alpha for the transcript). "We decided to conserve marketing resources during the second and most of the third quarter and we focused the marketing dollars we did spend more on retention versus acquisition then we have done in the past. Our share of voice was at its lowest level ever in the second quarter which impacted gross adds in the third quarter. The net result was a loss in third quarter of $1.1 million post paid subscribers."

So Sprint's strategy in recent quarters has been to shore up its losses by concentrating on retaining its current customer base, by improving call quality and services -- something Hesse says it's managed to accomplish this last quarter, as evidenced by improvements in the company's J. D. Power rankings. But that loss-reduction strategy has apparently come at a cost, which translated this last quarter into a loss -- compared with a minor profit for Sprint's fiscal third quarter last year.

As Hesse told one analyst, "We wanted to focus first and foremost on making sure, this is crucial to long term profitability obviously churn that we were inviting customers to an experience that was a good one and they would stay with us for a long time. We tended to move our marketing spend much more heavily toward retention versus acquisition while we, if you will, got our house in order and improved our customer satisfaction levels, care and retail, improvement the quality of our network, and what have you. As a result, we decreased our share of voice very substantially, actually to its lowest levels ever in Q2 and early Q3 then...the advertising levels are beginning to move back up more toward normal levels."

Because customer complaints have been reduced by 20% over the first quarter, Hesse said, Sprint was able to reduce staffing levels for its call centers, resulting in measurable cost reductions.

But perhaps the company's most significant effort in its customer retention project has been its branded data network offerings: specifically, its 3G Now Network with its Simply Everything data pricing plan, and its Xohm WiMAX efforts in conjunction with New Clearwire. It's the Now Network plan that's paying off now, with average revenue per user (ARPU) actually growing significantly -- among users of smartphones like Sprint's Samsung Instinct, the Simply Everything plan is driving up ARPU by an impressive 140% annually.

"Simply Everything has been focused primarily around migration and retention of customers," Hesse told one analyst. With regard to "churn" -- the trend all companies must fight toward loss of customers, he added, "We've [had] not only the lowest absolute churn levels, but the greatest improvement in churn has been evidenced by those on the most high value segment of the market, those spending $80 a month or more. Earlier, some time ago that was a significant problem... We're trying to bring people into what we call bundled offers. It's not just Simply Everything at $99 but we have a number of plans that go down to $69 a month that provide unlimited data. It's been particularly effective and the big numbers have come from migrating our own base."

What's amazing is that things could have actually been much worse for Sprint this last quarter. Capital expenditures, for example, declined by a stunning 59% over the previous year's Q3, to $485 million. So Sprint's strategy, implemented last year, to retain existing customers, improve its free cash flow, and reduce costs may actually be precisely the strategy it needs to face the current economic storm.