Sprint Still Months, Years Away From Turnaround

| About: Sprint Corporation (S)

Sprint (NYSE:S) reported its fourth quarter and full year results Wednesday morning, and the results were mixed. This was the first quarter Sprint could sell Apple's (NASDAQ:AAPL) iPhone, and sales were pretty good. However, the expenses that came with the iPhone were high as well, forcing Sprint to post another huge loss.

Some believe that the company is in the midst of a turnaround, but that argument has been debated for several years now. Sprint will be able to increase revenues and its subscriber base thanks to the iPhone, but at what cost? The company has a huge debt load currently, and 2012 is expected to be worse than 2011. In my opinion, Sprint is still months, perhaps years, away from a true turnaround, and that makes this a short candidate going forward. Let's look at the financial results and commentary from the company.

Quarterly and Full Year Results - The Highlights:

Here's what Sprint reported Wednesday morning for the quarter:

  • Revenues of $8.722 billion, slightly ahead of the $8.69 billion that was expected.
  • A 35 cent per share loss excluding items, compared to 37 cent loss expectations. However, including items, such as asset impairments and Clearwire (CLWR) losses, the company posted a 43 cent loss, the largest quarterly loss in several years.
  • Postpaid average revenue per user (ARPU) growth of $3.69, and 1.6 million total net subscriber additions.
  • Adjusted operating income margin of 10.8%, reduced by 8.8 percentage points due to the iPhone and Network Vision costs.
  • 40% of iPhone sales to new customers, well above what competitors Verizon (NYSE:VZ) and AT&T (NYSE:T) have done in the past.

Now for the year, the company reported the following:

  • First Year of positive operating income since 2006.
  • Revenues grew 3.4% to $33.679 billion.
  • Net loss, including items, of $2.89 billion, or 96 cents per share.

Those were the numbers, now let's get into some analysis.

Income Statement and Margin Analysis:

Here is Sprint's full year performance over the last four years:

Income Data 2008 2009 2010 2011
Revenues $35,635 $32,260 $32,563 $33,679
Gross Profit $18,889 $15,825 $15,071 $14,664
Operating Income ($2,642) ($1,398) ($595) $108
Net Income ($2,796) ($2,436) ($3,465) ($2,890)

Sprint's revenues are rising, but its costs are rising too. Despite being able to increase revenues by more than three percent in 2011, gross profit declined year over year. This was due to their cost of services rising by more than four percent, and cost of products rising by more than 15%. A large portion of the rising cost of products number was in the fourth quarter, when Sprint started selling the iPhone.

Here are Sprint's primary margin numbers, using non-adjusted operating income and overall losses (including special items):

Margins 2008 2009 2010 2011
Gross 53.01% 49.05% 46.28% 43.54%
Operating -7.41% -4.33% -1.83% 0.32%
Profit -7.85% -7.55% -10.64% -8.58%

Sprint was able to improve its operating and profit margins from 2010 to 2011, but you'll notice that 2011 profit margins are still well below numbers for 2008 and 2009, despite the great improvement in operating margins. We know the iPhone is going to be costly. In fact, Sprint might not even maintain the 40% gross margin number for 2012.

These numbers are only going to get worse. In 2010, Sprint reported adjusted operating income (before things like depreciation, amortization) of $5.633 billion. Despite the revenue growth in 2011, their adjusted number fell to $5.072 billion. For 2012, they are guiding adjusted operating income to a range of just $3.7 to $3.9 billion. That's well below 2011 levels, although analysts are expecting 2012 to be worse (more on that later).

The Heavy Debt Burdened Balance Sheet:

The following table shows key lines from the balance sheet over the past few quarters:

Financials 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11
Cash, Equivalents $5,173 $3,658 $3,956 $3,761 $5,447
Current Assets $9,880 $8,447 $9,182 $8,650 $10,337
Total Assets $51,654 $49,320 $49,043 $48,015 $49,383
CP of LT Debt* $1,656 $2,256 $2,256 $2,257 $8
Current Liabilities $7,891 $8,272 $8,631 $7,682 $6,499
Long Term Debt $18,535 $16,282 $16,278 $16,272 $20,266
Total Liabilities $37,108 $35,180 $35,717 $34,974 $37,956
Equity $14,546 $14,140 $13,326 $13,041 $11,427
*Current Portion of Long-Term Debt

Now before I get into the analysis, I'll show you how three important ratios have changed over this time:

Ratios 12/31/10 3/31/11 6/30/11 9/30/11 12/31/11
Current Ratio 1.25 1.02 1.06 1.13 1.59
Working Capital $1,989 $175 $551 $968 $3,838
Debt Ratio 71.84% 71.33% 72.83% 72.84% 76.86%

On the face of it, you would think the company's short-term financial situation improved greatly during the fourth quarter, looking at the huge increases in the current ratio and working capital. While those numbers did improve on the face of it, the change was purely cosmetic, so don't be fooled.

Sprint had $2.25 billion of its debt coming due in March of 2012. During the fourth quarter, they issued $4 billion of new debt, some of which was used to pay off the debt coming due. Thus, current liabilities dropped because the current portion of long term debt went from $2.257 billion to just $8 million. Sprint doesn't have any more debt due until 2013, so for another quarter or so the current ratio will seem to get better. You'll also notice that cash and current assets went up, but that was just due to the extra money (roughly $1.75 billion) they received from the new debt over paying back the old debt.

In fact, Sprint's debt (or liabilities to assets) ratio got much worse for the quarter, jumping 4 full percentage points. For every dollar of assets the company has, liabilities have increased by a nickel over the past year. That is not a good sign. The new debt that Sprint added in the fourth quarter also had much higher interest rates than the debt they paid back, so interest costs will rise going forward.

Looking Forward:

Sprint guided to 2012 revenue growth of 4 to 6 percent, which basically is in-line with the 5.1% currently expected by analysts. As I stated above, they also told us that their adjusted operating income will fall by more than a billion dollars, which is more than 20%.

In terms of earnings per share, Sprint did not give guidance. However, the loss in 2011 turned out to be 96 cents per share (analysts were looking for 87 cents), and current estimates call for $1.17 loss in 2012.

When I originally started writing about Sprint in September of last year, before they got the iPhone, estimates called for an 83 cent loss in 2011 and a 68 cent loss in 2012. By the end of October, after they started selling the iPhone, the estimates for losses were expanded to 91 cents for the 2011 period and 92 cents for 2012.

Now we know they lost 97 cents in 2011, so they did worse than analysts were expecting. But that $1.17 loss projected for 2012 is 50 cents more than it was in September. Sprint has about 3 billion shares outstanding, meaning analysts have increased their 2012 loss forecast by $1.5 billion. At $1.17, analysts are forecasting a $3.5 billion plus loss for this year, which would be the largest loss in more than four years. If that number proves true, Sprint will have lost $15 billion in just five years.

Overall - The Positives And Negatives:

As much as I am a bear on the name, I must give the company credit where it is due. Yes, they did sell more iPhones than expected. Yes, average revenue per user is up, and it seems like they are stealing some customers away from AT&T and Verizon. They should steal more away in 2012. Operating income for the year was positive for the first time since 2006. They also made a deal with Clearwire during the quarter that helped Clearwire most likely avoid bankruptcy and will keep the two companies partnered for the next few years.

But getting the iPhone is costly, and we found that out this quarter. Gross margins came down heavily in 2011, and that's with only one quarter of the iPhone. Imagine a full year. Sprint also increased its debt load during the quarter, which will result in higher future interest costs. The balance sheet overall has gotten worse.

Also, they keep pouring money into Clearwire, and they are losing more and more each quarter. This is a capital heavy business, and Sprint is planning on $6 billion in capital expenditures this year. Their Network Vision program remains on time and on budget currently, but Sprint has said in the past it may need more financing, which will come at very high rates.

Conclusion - Stock Still Shortable:

I know that I will be criticized for saying you should still short Sprint here. I was criticized when I said short it at $3.45. The people that criticized me then were gone when it was at $3. The people that criticized me at $3 were gone at $2.75. Those people were gone at $2.50. You get the idea.

Sprint is in the midst of a multi-year turnaround, but they are still losing billions of dollars each year. Could the stock get back to $5 eventually, sure, but when will that be? Sprint pays no dividend, while Verizon and AT&T pay 5 or 6 percent. If you want to play the iPhone, why buy Sprint? Buy Apple instead.

At nearly $2.50, I think Sprint can and will go lower. I've always maintained that I wouldn't be a full buyer of this name until we got below $2, and primarily into the $1.50 to $1.75 range. Sprint needs to improve its profitability before I will be a believer, and that won't be happening in 2012. This might be a decent investment later this year or in early 2013, but for now, it just isn't viable to me.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.