Over the last few months I've been decidedly negative on Sprint (S), and with good reason. The company is losing lots of money, has a large amount of debt, and is struggling to keep Clearwire (CLWR) afloat. The good news is that the company now has the iPhone, but that may not help it right away. I think Sprint's stock may still be a few months out from a bottom, but I think it could turn higher in late 2012 if it gets things going. Since I've written about Sprint a lot lately, this will be my last article on the company until the next piece of major news comes out. But here are the four major issues the company is currently dealing with.
1. The iPhone Battle With Verizon (VZ) and AT&T (T):
Sprint has gotten rights to start selling Apple's (AAPL) iPhone over the last month, but people think that Sprint will reap the benefits right away. Well, it will on the revenue side, but there are a few things to consider here. First, Sprint is not getting all 30 million iPhones right away; it's a four-year deal. Sprint will get these phones over time, so it will only sell a couple million this quarter and next.
The second issue is that Sprint needs to sell its iPhones to customers not currently using Sprint. I'm a Sprint customer who currently pays $60 a month for service. I decide to renew my two-year contract and get the iPhone with the $80 a month unlimited plan from Sprint. Sprint gets $200 from me for the purchase of the phone, plus an activation fee (currently about $36). The company also gets $20 in additional revenue from me per month. Over two years, that's $240. So, in total, Sprint collects $476 from me thanks to the iPhone. But the cost of the iPhone is approximately $655. So it is losing $180, and that's before any of the other expenses the company has. Not a good proposition.
That example gets even worse if I am a Sprint customer upgrading to the iPhone and I already have the $80 unlimited plan. In that case, Sprint only gets $236 per phone, meaning a loss of about $420. Ouch. If Sprint has too many current subscribers upgrade to the iPhone, it is a losing proposition. For every new customer they bring in, the incremental revenue would be about $1,300 (24 months at $80 plus the activation fee minus the iPhone cost).
2. The Ongoing Court Case for AT&T Buying T-Mobile:
Sprint continues to fight this deal as hard as it can, but the legal costs will add up for the company. While the DOJ's attempt to block it was initially positive for Sprint, nobody thought that the deal would pass without any fight. If the deal goes through without any restrictions, it would be a major blow for Sprint. However, I don't think the worst-case scenario will happen for Sprint. I think the deal eventually goes through, but there will be some concessions. The extent of those will determine how bad Sprint loses in this fight. Of course, there is the small chance that Sprint could win if the deal is completely blocked. I see this issue being resolved in early to mid 2012, so hopefully, even if things don't end up well for Sprint, it will be one less battle for the company to be fighting going forward.
3. Can Clearwire Be Saved?
Sprint has put a lot of time, effort, and money into Clearwire, but as every poker player knows, there are hands where you just need to fold rather than throw more chips into the pot. At the end of last quarter, Sprint had over $2 billion still invested in Clearwire securities. While not all of this was in stock, Clearwire shares are down another 20% so far this quarter. Sprint's investment is eroding by the day. Clearwire is projected to lose about $550 million this year and $300 million next year. Clearwire's balance sheet is worse than Sprint's, and that's saying something. So what should Sprint do?
Well, I've heard that Clearwire needs anywhere from $500 million to $3 billion of new funding, and that's a definite issue for the company. I don't think that Sprint can afford to invest another billion or so in Clearwire. But it may have to. A Clearwire bankruptcy means Sprint would lose at least another $1 billion on its investment, if not the whole $2 billion currently held. Propping up Clearwire might cost as much as letting them fail, but Sprint may need to do it. The only hope is that if Clearwire gets the funding, things could improve. But I don't see how right now.
4. Sprint's Balance Sheet Issues
I'll add a few points that I recently discussed in my latest Sprint article. Sprint just received $4 billion in new funding at an average interest cost of about 10%. The company has already stated it needs another $3 billion of financing for its network and infrastructure upgrades. The company also has $2.25 billion of debt coming due in March of 2012, which most likely will be refinanced at higher rates (averaging 7.8% interest on that debt now). The company has $8 billion of debt coming due in the next four years, with an average interest cost of 6.8%. If they have to refinance all of it, it's quite possible that those interest rates could double. There is an important table from my above-mentioned article that I must include.
| (Millions) | 12/31/2008 | 12/31/2009 | 12/31/2010 | 9/30/2011 | Now |
| Assets | $58,252 | $55,424 | $51,654 | $49,043 | $53,043 |
| Liabilities | $38,647 | $37,329 | $37,108 | $35,717 | $39,717 |
| Equity | $19,605 | $18,095 | $14,546 | $13,326 | $13,326 |
| L/A | 66.34% | 67.35% | 71.84% | 72.83% | 74.88% |
| L/E | 197.13% | 206.29% | 255.11% | 268.02% | 298.04% |
"Now" includes addition of $4 billion to cash and debt accounts, assumes no balance sheet changes so far in this quarter.
Sprint now has $3 of liabilities for every dollar of equity it has. That compares to $2.15 for Verizon and $1.39 for AT&T. Interestingly enough, Research in Motion (RIMM) has only $0.41 cents of liabilities per dollar of equity, and Google is at $0.26. That shows you how capital-intensive this business is for the carriers. Those ratios will only get worse as Sprint continues to lose money and increase its debt load. If all goes wrong, there is a chance, albeit small, that Sprint could have more liabilities than assets by the end of 2012. That would be an extremely alarming sign. I don't think that will happen currently, but you can see from above that the asset base is shrinking and liabilities are going up.
Conclusion
Sprint cannot fight a successful four-front war. Hopefully, the AT&T/T-Mobile deal will be resolved quickly in 2012, and Sprint can get that off its plate. The other three issues will linger though, and Sprint will have to focus on which is most important. Right now, getting new subscribers to the iPhone is its first mission; that will help the company improve the balance sheet over time. Clearwire is an important issue, but the future of Sprint is not dependent on just Clearwire. The iPhone carries much more weight.
I've been saying for weeks that I believe Sprint could eventually turn it around, and the stock could trade up to $5-$10 within the next few years. But I don't see that in the short term. In fact, I think we see the $1.50-$2.00 range first. Once Sprint gets the $3 billion in new financing it needs and the $2.25 billion comes due in March, we'll have a better idea of where their expenses are going in the future. We know the revenues will increase thanks to the iPhone. But Sprint's ability to keep costs under control will likely determine the future of this company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
