An Ignoble Experiment

2. Alcatel-Lucent posts wider Q2 loss, forges small cell pact with Qualcomm

Sprint (NYSE:S) reported a steeper-than-expected net loss for the second quarter and shed more than 2 million total wireless customers in the period, with much of that related to its June 30 shutdown of its Nextel iDEN network.

Despite the weak results, Sprint is looking to the future now that SoftBank has closed its acquisition of 78 percent of Sprint for $21.6 billion, a transaction that includes Sprint's purchase of Clearwire. SoftBank is now pumping $5 billion of new capital into Sprint, and Sprint is adding Clearwire's 2.5 GHz spectrum to its LTE coverage portfolio and expects to have several thousand TD-LTE sites using that spectrum on air by year-end.

Sprint CEO Dan Hesse said on the company's earnings conference call that with the addition of scale and capital from SoftBank, spectrum in Midwestern markets from U.S. Cellular (NYSE:USM), Clearwire's spectrum and the continued rollout of Network Vision, Sprint believes it can, "over time, build a powerful network and a much stronger competitor."

Steve Elfman, president of network operations at Sprint, gave a hint of that long-term strategy when he noted during the call that Sprint now plans to deploy Clearwire's 2. 5 GHz spectrum on all 38,000 of its planned Network Vision cell sites and even more sites than that in a nationwide rollout. Previously, Sprint had said it would use Clearwire's spectrum as a "hotspot" LTE network to offload traffic in urban markets. Now, it appears Clearwire's spectrum will become a much more integral part of Sprint's long-term plans to boost overall capacity on its network. The expanded deployment of Clearwire's spectrum will continue through next year. Clearwire commands around 160 MHz of spectrum in the top 100 markets.

Here is a breakdown of Sprint's key quarterly metrics:

Network Vision/LTE: Sprint said it made solid progress on its Network Vision network upgrade program, including shutdown of the iDEN network. To date more than 20,000 Network Vision sites are on the air, compared to more than 13,500 Sprint reported with its first-quarter results. The company said the number of sites that are either ready for construction, where construction is already underway or completed has grown to more than 30,000. As part of Network Vision, Sprint has launched LTE in 151 cities, including Atlanta, Boston, Dallas, Los Angeles and Miami. Sprint said it continues to expect to cover 200 million POPs with LTE by the end of 2013.

Elfman said that Sprint has been refarming the 800 MHz spectrum it used for iDEN service for CDMA voice service and capacity, and that in the late third quarter Sprint will begin deploying LTE service on its 800 MHz spectrum. He also said that in the fourth quarter Sprint will launch smartphones that are capable using Clearwire's 2.5 GHz airwaves, and that in 2014 all Sprint devices will be able to access that spectrum (though he declined to say if the iPhone will as well).

Elfman added that as Sprint gets toward its goal of covering 200 million POPs with LTE by year end to will begin to have a "critical mass" of coverage in most of the key markets across the country. At that point, he said, "we think our marketing team will be able to market the network as having the density to compete effectively."

Verizon Wireless (NYSE:VZ) now covers 301 million POPs with LTE. By the end of the year, AT&T Mobility (NYSE:T) plans to cover 270 million POPs with LTE and T-Mobile plans to cover at least 200 million POPs with LTE.

iPhones and smartphones: Sprint activated 1.4 million Apple (NASDAQ:AAPL) iPhones in the quarter, down from 1.5 million in the first quarter and the year-ago period. Sprint said 41 percent of its iPhones sales were to new customers, down from 43 percent in the first quarter. Hesse said Sprint remains "well ahead of our committed sales volumes to Apple." Smartphones represented 86 percent of Sprint platform postpaid handset sales in the second quarter.

Subscribers: In total, Sprint lost 2.034 million wireless customers in the second quarter, with 1.3 million of them coming from the Nextel platform. Sprint recaptured 34 percent of leaving postpaid Nextel customers to its Sprint platform of its CDMA/LTE networks. The carrier also lost 520,000 total customers on the Sprint platform, including 486,000 Sprint prepaid customers. As expected, the Sprint platform lost prepaid customers as a result of planned deactivations related to regulatory changes to the Lifeline program, which impacted Sprint's lower-ARPU Assurance brand. This was partially offset by strong Assurance gross additions and continued growth in both Virgin Mobile and Boost Mobile subscribers. Sprint lost 228,000 wholesale and affiliate subscribers, mainly as a result of Sprint MVNOs deactivating inactive accounts. The one bright spot was that Sprint gained 194,000 postpaid customers to the Sprint brand.

Sprint CFO Joe Euetneuer said that the company expected prepaid growth to rebound in the second half of the year, but that postpaid growth would continue to be held back by a number of factors, including the competitive environment, seasonality and "mixed" enterprise accounts that had both CDMA and iDEN subscribers. Often those enterprises had large contracts, and while Sprint has been working to win those customers over to its CDMA and LTE networks, executives said that those mixed accounts would continue to present issues for Sprint in the third quarter.

Churn: Sprint's total retail postpaid churn was 2.63 percent, up from 2.09 percent in the first quarter and 1.79 percent in the year-ago period. Total retail prepaid churn was 5.51 percent, up from 3.26 percent in the first quarter and 3.53 percent in the year-ago quarter. Both were likely negatively impacted by the Nextel shutdown. Sprint platform postpaid churn was 1.83 percent, down from 1.84 percent in the first quarter but up from 1.6 percent in the year-ago period.

ARPU: The company said total retail postpaid average revenue per user increased to $63.59, up from $62.47 in the first quarter and $60.88 in the year-ago quarter. Sprint platform postpaid ARPU rose to $64.20, a new record, up from $63.67 in the first quarter and $63.38 in the second quarter of 2012. Total retail prepaid ARPU was $27.02, up from $26.08 in the first quarter and $26.59 in the year-ago period.

Financials: Sprint reported a net loss of $1.6 billion, wider than the $1.4 billion loss in the year-ago quarter. The result included $430 million of depreciation and charges of $623 million related to the Nextel platform shutdown. Net revenue inched up slightly to $8.88 billion, and Sprint platform wireless service revenue increased 8 percent year-over-year to highest-ever of $7.2 billion.

For more:
- see this release
- see this WSJ article (sub. req.)
- see this Bloomberg article
- see this CNET article
- see this AllThingsD article

Special Report: Wireless in the second quarter of 2013

Read more about: Clearwire, SoftBank
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Special Report: Wireless in the second quarter of 2013

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Alcatel-Lucent (NYSE:ALU) reported a wider net loss for the second quarter due to restructuring charges, but the company also unveiled a partnership with chipset maker Qualcomm (NASDAQ:QCOM) to develop small cells for 3G, LTE and W-Fi networks. Qualcomm will also separately take a small stake in Alcatel-Lucent, news that sent the infrastructure vendor's shares up.

Alcatel-Lucent said its second-quarter net loss grew to $1.17 billion, up from a loss of around $336 million in the year-ago period. The loss includes a $731 million impairment charge related to the reorganization of its wireless business and a $257 million restructuring charge.

On the bright side of the ledger, the vendor's operating profit, excluding reorganization and impairment costs, came in at close to $32 million, as total revenue rose 1.9 percent year-over-year to $4.78 billion. Analysts had expected the company post an operating loss and a drop in sales, according to Bloomberg.

Sales in North America were a particular bright spot for Alcatel-Lucent, with sales in the region growing 17.1 percent year-over-year to around $2.17 billion. Sales in every other region of the world declined year-over-year for the company. The company's networks division reported a 5.9 percent rise in sales, but its wireless business declined 1 percent, with revenue of around $1.33 billion. Alcatel-Lucent said its managed services business reported a 15 percent drop in sales to $285 million. The vendor said it has been exiting unprofitable managed services deals and said it has now "addressed" 14 out of the 15 deals in question.

In June CEO Michel Combes unveiled a new restructuring of the company's business focus and balance sheet, intent on reversing seven years of losses at the vendor. The company's "Shift Plan" envisions that it will become more of a specialist by focusing on several core areas in IP networking, and in wireless it will put more emphasis on LTE and small cells and move away from investing in legacy technologies.

As for Alcatel-Lucent's new deal with Qualcomm, Combes said Qualcomm would buy a small stake of less than 5 percent in Alcatel-Lucent. He said the company is looking for three to five other partners to invest in other joint business ventures and to take small stakes totaling just over 5 percent. He said "discussions are under way" on such deals, according to the Wall Street Journal.

The vendor's small cell partnership with Qualcomm will focus on capturing sales from carriers looking to use small cells to boost network capacity in dense urban areas and crowded venues. The two companies plan to jointly invest in a "strategic R&D program" to develop the next generation of Alcatel-Lucent's lightRadio small cell products, which will use Qualcomm chipsets. Citing an unnamed source, the Financial Times reported that the R&D investment from Qualcomm will be worth more than $132 million.

In June Qualcomm unveiled its FSM99xx family of 28-nanometer chips that integrate 3G and LTE for use in small cells. The chipsets support concurrent 3G and LTE operation or dual-carrier LTE with carrier aggregation in pico, metro and enterprise small cells. They also support 802.11ac/n Wi-Fi capabilities. The Qualcomm FSM99xx chips, which incorporate modem technology gained through Qualcomm's acquisition of DesignArt Networks in August 2012, are the first small cell chips from Qualcomm to include LTE connectivity.

For more:
- see this Alcatel-Lucent earnings release
- see this Alcatel-Lucent/Qualcomm release
- see this WSJ article (sub. req.)
- see this Bloomberg article
- see this Reuters article
- see this FT article (sub. req.)

Read more about: Qualcomm, Alcatel-Lucent
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3. T-Mobile to launch wider, 2x10 MHz channels for LTE by year-end

By Phil Goldstein

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4. HTC warns of potential Q3 operating loss, plans more mid-tier products

T-Mobile US (NYSE:TMUS) will expand the spectrum channels it is using for LTE service to 2x10 MHz in the vast majority of the major markets across the United States by year-end, the company said.

"Nationwide, we plan to deploy 10+10 MHz of LTE in 90 percent of the top 25 markets by the end of the year," a company spokesperson told LightReading. The carrier has been testing that spectrum configuration in a few areas of New York City, which is one of the markets that will get the wider channels by the end of 2013. Wider spectrum channels enable faster downlink speeds.

T-Mobile's LTE network now covers 157 million POPs in 116 markets, and the company expects to cover 200 million POPs with LTE by year-end. As GigaOM recently noted, many of T-Mobile's initial LTE markets used only 10 MHz of spectrum, as Sprint (NYSE:S) does with its current LTE deployment, while about half of T-Mobile's coverage uses a full 20 MHz of spectrum, as Verizon Wireless (NYSE:VZ) does with its LTE network and AT&T Mobility (NYSE:T) does in most markets.

However, T-Mobile's LTE network is in a constant state of flux, as the company continues to upgrade its network via vendors Ericsson (NASDAQ:ERIC) and Nokia Siemens Networks. T-Mobile is refarming its AWS spectrum for LTE service and the vast majority of its PCS spectrum for HSPA+ service. T-Mobile is also busy integrating MetroPCS' AWS spectrum into its LTE network, which is providing more bandwidth and spectrum depth.

A major impetus for T-Mobile's move toward wider LTE spectrum channels was its acquisition of MetroPCS' spectrum. T-Mobile has repeatedly said the transaction will allow it to deploy 2x20 MHz LTE in 90 percent of the top 25 U.S. markets using MetroPCS' spectrum in 2014 and beyond, which will give its network even faster speeds than what it hopes to achieve by year-end. The combined T-Mobile and MetroPCS networks have 76 MHz of total spectrum in the top 25 major metro areas.

Verizon now covers 301 million POPs with LTE. By the end of the year, AT&T Mobility plans to cover 270 million POPs with LTE and Sprint plans to cover at least 200 million POPs with LTE. Sprint has said it will start deploying LTE on its refarmed 800 MHz spectrum late this year and also plans to use Clearwire's 2.5 GHz spectrum in a nationwide LTE deployment, which will substantially increase its own network capacity.

For more:
- see this LightReading article

Read more about: wireless spectrum, Metropcs
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By Phil Goldstein

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5. AT&T launches LTE-capable home phone and Internet service

HTC, struggling to gain traction on the back of its flagship One smartphone, warned that it could post an operating loss for the third quarter, which would be its first since it became a public company in 2002. The smartphone maker also said it will release more mid-tier products to help it shore up its business.

Earlier this month HTC reported an 83 percent drop in net profit in its second quarter. For the third quarter, HTC said that it expects revenue of between $1.7 billion and $2 billion, which is below a market consensus of $2.2 billion, according to Reuters, and would be 30 percent less than the $2.36 billion HTC had in the second quarter.

In a statement, the company said its overall gross margin has been impacted by "the relatively higher cost structure, lack of economy of scale and certain provisions needed to facilitate the clearance of aging products in the channel." The company said it has taken actions to address these issues and expects to see improvements in the fourth quarter.

Still, the company faces serious headwinds as it looks to chart a recovery and get back to growth; if revenue does fall in the third quarter it would be the eighth consecutive decline in quarterly sales for HTC.

"Scale is one of our challenges and we recognize that…we have more mid-tier products coming later this year, and this product portfolio will help us return to momentum," CEO Peter Chou said Tuesday on the company's earnings conference call, according to the Wall Street Journal.

Chou, who has previously said HTC will not go after the low end of the smartphone market, said new mid-tier products will be coming in the late third or early fourth quarters. "We suffered a little bit in this mid-tier market share from the end of last year to so far, in terms of competition," he said, according to the IDG News Service. "However, with this new range of mid-tier products we will address those challenges."

Once second only to Apple (NASDAQ:AAPL) in U.S. smartphone sales, HTC has been squeezed at both the high end and the low end of the market. Analysts painted a gloomy picture of HTC's prospects: "The company is seeing challenges on all fronts," Yuanta Securities analyst Dennis Chan told the Journal. "Sales are slowing, there are problems with supply chain management and execution. The high-end market is saturating and Samsung is cutting prices, which will put even more pressure on HTC."

"It doesn't seem like the company has any strategy that can turn this around," said Daniel Chang, an analyst at Macquarie Securities.

Chou acknowledged that gaining market visibility for new products will remain a challenge. "The market is a little confused right now. There are too many products coming out," he said. "That's why we are planning to have a new range of products to try and stay competitive in the market."

Amid a wave of executive departures and shakeups, Chou said HTC is hoping to retain top talent partly by launching a new employee incentive program.

For more:
- see this release
- see this WSJ article (sub. req.)
- see this Bloomberg article
- see this Reuters article
- see this IDG News Service article
- see this Engadget article

Related Articles:
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HTC COO latest to step down from smartphone maker
HTC loses chief product officer amid a wave of departures

Read more about: quarterly earnings, Peter Chou
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By Mike Dano

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