Seybold Rings Up Sprint PCS

10/16/2002 12:00 am EST

Focus:

Andrew Seybold

Editor-in-Chief, Forbes/Andrew Seybold's Wireless Outlook

Never heard of ARPU? Andrew Seybold notes, “To help separate the winners from the losers in wireless, keep your eye on ARPU. It isn’t a person. It’s a number. It means average revenue per user, and it is the amount of money each wireless customer generates for the network.” Based on ARPU, Seybold considers Sprint PCS ahead of the competition. The latest Forbes/Andrew Seybold Wireless Outlook explains.

Sprint PCS (PCS NYSE), which traded at $29 a share one year ago, is now down over 90%, trading just above $2. In comparison, shares of AT&T Wireless are down 73% and Nextel is down 45%. Why Sprint’s poor performance? Well, folks have been worrying about its debt, wondering when it would launch a high-speed, 3-G wireless network and have been hearing stories that the quality of its customer base is eroding. These worries are legitimate, but greatly overblown.

“Over the last four years, Sprint PCS has signed on new customers at a faster rate than any other wireless operator. Yes, that record was broken in the second quarter of this year when Sprint PCS announced that it had only signed on 308,000 net new subscribers. The stock plunged. It shouldn’t have. The subscriber fallout was due to a deliberate slowdown in marketing. Sprint PCS was on the verge of launching its new 3G data service, Vision, and was waiting to make a big marketing push. Net subscriber adds for the third quarter could be disappointing as well, in part, because not all of the handsets were ready when PCS launched Vision. But that should already be priced into the stock.

“While net adds may move the stock, investors should pay more attention to ARPU (average revenue per user). Here Sprint PCS outshines its competitors. Its ARPU is $68 versus $60 for AT&T Wireless and $49 for Verizon Wireless. Sprint PCS has been able to increase its monthly ARPU even as it reduces price plans. Sprint customers spend more time on the network than subscribers of most rival services. Each Sprint subscriber uses an average of 660 minutes per month.

“How about Sprint PCS’ $16 billion in debt? That doesn’t worry us all that much. The company has plenty of cash and it should break even on a free cash flow basis early next year. It also just sold its direct business for $2.2 billion in cash. This will give it additional liquidity. We also like the company’s relatively low cost of acquiring new customers. Its cost per gross additional customer is just $350, compared to $383 for AT&T Wireless and $440 for Nextel. 

"Bottom line: in many ways Sprint PCS is in better shape than its competitors. It is the fourth largest wireless operator in the country, with more than 16 million wireless customers. And its network is based on CDMA, a far more efficient technology to transport data and voice than GSM. Yes, there are risks. But if you think wireless will eventually recover, Sprint PCS looks like a gold-plated bet. The stock is attractive for investors with a long-term outlook.”

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