Why Sprint Needs the Palm Pre to Succeed

Sprint Nextel Corp. (S) reported fiscal fourth quarter and 2008 full year results this morning and the company managed to lose only a penny versus consensus estimates of a three cent loss. As is common, these results exclude one-time charges related their merger with Nextel back in 2005. It has been rough going for the company ever since the merger, as the two companies’ network technologies did not immediately mesh. The result has been falling revenue and significant subscribers losses. However, the market seems to have brushed aside these two continuing problems and focusing on the earnings “beat”, as the stock is up more than 27% in morning trading.

Sprint stock has been in freefall since the summer of 2007, when it was in the low $20s, and the company soon after suspended it dividend. The company’s earnings and revenue have been drooping as well, but this is the company’s first quarterly loss recently (when not taking into account charges). Revenue fell by 14% in the last year and was worse than analysts expectations, and expectations for the next year are predicting a further drop in revenue as well.

During the quarter, Sprint lost another 1.3 million subscribers with the vast majority being the highly sought after “postpaid” variety. This brings the total number of subscribers down to 49.3 million an 8.4% decline over fiscal 2007’s year end. With Sprint’s main competitor’s AT&T (T) and Verizon (VZ) gaining subscribers through the downturn, the gap between the “have’s” and the “have not’s” continues to expand. The wireline (mostly internet) business was not much better as revenues in that area dropped 6%.

It is clear that Sprint needs something to make customers stick around, and they believe that they have that silver bullet with their exclusive deal with Palm (PALM) to provide the new Pre handset. Many of the early reviews of the Pre have been quiet impressive and some tout it as the first real challenger to Apple’s (AAPL) iPhone. Well, for Sprint to return to profitability, they certainly hope so. One “must-have” handset can be a huge boon to a carrier, and with Sprint’s high churn rate it needs to give consumers something to get excited about. The release of the Pre at this point is still source of speculation, as internet message boards buzzed with the rumor of a February 15th release. Obviously, that did not happen, but it should be a good sign that the public is showing significant interest. The best that fans of the Pre can do now is sign up for updates on the Sprint web site.

We still have an Undervalued valuation on Sprint as the company’s continued loss in share price does make the stock look more attractive compared to historical norms. However, as you can tell from the previous paragraphs, we have significant concerns with Sprint as it continues to hemorrhage subscribers. Sprint cut 8,000 jobs last month, which in this environment is not surprising at all. The production of free cash flow is impressive and works favorably in our analysis. Although some strides were made in the quarter, we fear that Sprint could be the dreaded value trap. As we have stated, the company is not profitable at this point and is losing its revenue base at an alarming rate. Furthermore, the company has a substantial amount of debt on its balance sheet. Ben Graham liked to find stocks with a Debt/Equity ratio of .1, with nearly $39 billion in debt right now Sprint has nearly 20 times more debt than Graham would have liked to see.

With so much riding on the Pre release, it is worth noting that there are rumors of Apple suing Palm over patents related to the Pre’s multi-touch technology. Many who test drove the Pre at the Consumer Electronics Showcase or CES, where it was unveiled, said it was eerily similar to the multi-touch interface of the iPhone. This is certainly something for Sprint and Palm investors to keep a close watch on. As Apple’s acting CEO Tim Cook said in the most recent conference call,

“We approach this business as a software platform business. We are watching the landscape. We like competition as long as they don’t rip off our IP. And if they do, we will go after anyone who does…I don’t want to talk about any specific company. We are ready to suit up and go against anyone. However, we will not stand for having our IP ripped off.”

Comments

[martyg:]

apple has rented a greyhound bus so it can transport all its lawyers in the event that sprint steps over the patent line.

Feb 20 09:44 AM

[mollytjm:]

Palm would have to be desperate to rip off Apple's IP... but, wait... they are...but are they also that dumb? Apple is very aggressive about its patents. i wouldn't be surprised to see Palm delays, as we already have. How long has it been since Palm really improved it's product? If the Pre isn't great, it'll be another Vista and could be real trouble for Palm.
In deciding stock buys, Apple at these prices is great... but i'd wait on the Palm product and surety of design ownership before going that route.

Feb 20 09:44 AM

[Hedged In:]

There's a useful table of other iPhone competitors here: apple20.blogs.fortune....

Feb 21 12:39 PM

[Geddy:]

Wasn't VZW counting on the Blackberry Storm to counteract the iPhone as well as T-Mobile (with whatever phone they put out last year to do the same thing)? I personally think the iPhone is crap (what, you can't change out the battery on a $300+ phone?????) but putting "your chickens in one hat" doesn't work. Even AT&T is losing money on all the iPhone customers.

Feb 22 03:04 PM

[Aryamehr:]

It is my understanding from a very reputable source, that to date has never been wrong, that the Palm Pre is scheduled to be released in March so that its effects can be manifested in the 3rd Quarter results for Palm & Sprint. This strategy makes perfect sense. For one, it gives insurance and a cushion to both companies possible not perfect 2nd Quarter and it also gives enough time to mgmt in both companies to prepare for any bugs and possible snags. Sprint has already garnered a First position in Customer Service from JD Powers and it has also garnered a First position from Gismoto in Data Downloads when compared to ATT & VZ. Predicated on their recent results Sprint's CFO has also done a wonderful job of cutting expenses. Palm has also done a wonderful job in engrossing the publics attention, granted with a superior product. One thing everyone should stop doing is comparing the Pre with the iPhone, they are just miles apart in speed and versatility. The Pre is the next generation and I will assure you that it will take at least two years for Apple to emulate the Pre, and by then everyone will have already caught up, but Palm, with its WebOS, intends to be the MS of the wireless world. Can they do it, possibly. If I were MS or Apple I would invest a couple of Billion and buyout Palm before they become a major threat. Before its' launch it is already shaking the techno-world, just imagine what will happen once it is launched and it performs as well as it did at the CES.

Only a fool underestimates his competition!

Feb 22 04:41 PM

[Geddy:]

Not sure how old the JD Powers you're reading is but Sprint finished last in pretty much every category for national wireless carriers.


On Feb 22 04:41 PM Aryamehr wrote:

> It is my understanding from a very reputable source, that to date
> has never been wrong, that the Palm Pre is scheduled to be released
> in March so that its effects can be manifested in the 3rd Quarter
> results for Palm & Sprint. This strategy makes perfect sense.
> For one, it gives insurance and a cushion to both companies possible
> not perfect 2nd Quarter and it also gives enough time to mgmt in
> both companies to prepare for any bugs and possible snags. Sprint
> has already garnered a First position in Customer Service from JD
> Powers and it has also garnered a First position from Gismoto in
> Data Downloads when compared to ATT & VZ. Predicated on their
> recent results Sprint's CFO has also done a wonderful job of cutting
> expenses. Palm has also done a wonderful job in engrossing the publics
> attention, granted with a superior product. One thing everyone should
> stop doing is comparing the Pre with the iPhone, they are just miles
> apart in speed and versatility. The Pre is the next generation and
> I will assure you that it will take at least two years for Apple
> to emulate the Pre, and by then everyone will have already caught
> up, but Palm, with its WebOS, intends to be the MS of the wireless
> world. Can they do it, possibly. If I were MS or Apple I would invest
> a couple of Billion and buyout Palm before they become a major threat.
> Before its' launch it is already shaking the techno-world, just imagine
> what will happen once it is launched and it performs as well as it
> did at the CES.
>
> Only a fool underestimates his competition!

Feb 23 12:54 PM