Sprint Continues to Post Losses

| About: Sprint Corporation (S)

Sprint Nextel (S), the third-largest U.S. wireless carrier, reported third quarter 2010 adjusted net loss per share of 18 cents, which surpassed the Zacks Consensus Estimate of net loss of 28 cents. Adjusted earnings excluded a one-time tax related to non-cash charge of $365 million (12 cents per share). Sprint reported its third quarter results before the opening bell.

On a GAAP basis, Sprint posted a net loss of $911 million (30 cents per share), 91% more than the net loss of $478 million (17 cents) in the year-ago quarter. Third quarter loss widened as Sprint spent more to upgrade its handsets and increase sales of its products.

Consolidated operating revenue inched up 1% year over year to $8.152 billion and was above the Zacks Consensus Estimate of $8.023 billion. This marks the first quarterly increase in three years. Higher revenues were driven by strong revenues from prepaid Boost service and equipment, partially offset by lower contributions from its wireline and post-paid wireless businesses.

Adjusted OIBDA (operating income/loss before depreciation, amortization, asset impairments and abandonments) fell 11% year over year to $1.3 billion. Higher handset subsidy as well as increased sales expenses put a drag on adjusted OBIDA in the third quarter.

Segment Results

Wireless: Consolidated revenue from the wireless segment increased 4% year over year to $7.2 billion. Sprint gained approximately 644,000 subscribers in the reported quarter, which represents net additions of 364,000 in retail subscribers and 280,000 in wholesale and affiliate subscribers. This represents the best wireless subscriber growth since 2006.

A net loss of 107,000 customers in the retail post-paid business reflects a considerable improvement from a net loss of 801,000 subscribers in the year-ago quarter and 228,000 subscriber loss in the previous quarter. Demand for handsets such as “Samsung Epic 4G” as well as “HTC EVO 4G” led to the increase in the retail post-paid subscribers. The company added 276,000 post-paid subscribers from the CDMA network while lost 383,000 customers from the iDEN network.

With regard to prepaid subscriptions, Sprint added a total of 471,000 customers, which represents net additions of 1.2 million CDMA customers, partially offset by net loss of 700,000 iDEN customers.

At the end of the third quarter, Sprint had 48.8 million customers (including 33.1 million post-paid, 11.6 million prepaid and 4.1 million Wholesale and Affiliate) compared with 48.3 million in the year-ago quarter.

Post-paid ARPU (average revenue per user) declined to $55 from $56 in the year-ago quarter due to lower overage, casual data and text revenues, partially offset by higher monthly recurring revenue. Prepaid ARPU plunged to $28 from $35 in the year-ago quarter, attributable to the Assurance Wireless plan and the acquisition of Virgin Mobile in November 2009 as Virgin Mobile customers have lower ARPU as against Boost Mobile customers.

Sprint posted post-paid churn of 1.93%, the highest in five years, compared with 2.17% in the year-ago quarter and 1.85% in the sequential quarter, attributable to improved customer retention. Prepaid churn improved to 5.32% from 6.65% in the year-ago quarter and 5.61% in the sequential quarter. The year-over-year improvement is attributable to the lower churn of Virgin Mobile customers.

Wireline: Revenues from the wireline segment declined 12% year over year to $1.2 billion owing to erosion in voice and data revenues declining14.5% and 16.7%, respectively. Internet revenues also dropped 8.5% year over year.


Sprint enjoys a strong balance sheet with approximately $4.7 billion in cash and cash equivalents and $18.5 billion in long-term debt.

The company spent $462 million in capital expenditure in the third quarter compared with $431 million in the year-ago quarter. The company generated free cash flow of $384 million, down from $664 million in the year-ago quarter.

Sprint Nextel expects post-paid, prepaid and total net subscriber results to improve sequentially in the fourth quarter. Capital expenditure is expected to be approximately $2 billion in 2010. The company is also likely to generate positive free cash flow during the remainder of 2010.

Our Analysis
Sprint is well positioned to leverage the growing wireless smartphone market in the U.S.with its rich portfolio of popular smartphone offerings and more advanced devices in the pipeline. We believe an attractive wireless product/service mix, expanding 4G network footprint, new Virgin Mobile “Beyond Talk” data-centric plans, Assurance Wireless plans and the Boost Mobile prepaid business will continue to add opportunities in the wireless business. The company’s deployment of 4G WiMax is a major prospect in the wireless market and may boost the company’s revenues.

However, we believe a lower margin-revenue mix, expenditures related to wide-scale 4G service deployments and weak wireless business may impact financials over the near term. In addition, Sprint’s prepaid business is expected to face fresh challenges with intensified competition in the balance of 2010 from the aggressive rollout of competitive price plans by its rivals.

We are currently maintaining our Neutral recommendation on Sprint, supported by a Zacks #3 Rank (Hold).