Sprint Nextel (S) reported first-quarter 2012 earnings Wednesday. Revenue grew 6% compared to the first quarter of 2011, driven by higher average revenue per user, as subscribers continue to opt for smart phones tied to higher-priced data plans. The company sold over 1.5 million Apple (AAPL) iPhones, and we think that adding the phone to its lineup, though expensive, has allowed the company to compete with AT&T (T) and Verizon (VZ). A whopping 86% of Sprint platform post-paid phone sales were smartphones, and Sprint now has 69% of its postpaid customers using smartphones. We think this will continue to drive revenue growth as more customers opt for unlimited, premium data plans. Our fair value for Sprint in our DCF model remains unchanged; it has a Valuentum Buying Index rating of 3.
In spite of solid revenue growth, the company's net loss increased to $863 million compared to $439 million a year ago. Free cash flow fell 22% relative to the first quarter of last year; however, it is important to note that free cash flow is still positive, albeit only by $138 million on over $8.7 billion in revenue. We expect the company's heavy debt load and enormous iPhone obligation to impair profitability for the foreseeable future. Of its $22.2 billion in debt, only about $1.5 billion is maturing in 2013, so we don't think Sprint will have any short-term liquidity crunch (at least for now).
The company also continues to work on improving its network and adding 4G LTE coverage to metropolitan areas. We think improved network service could help drive retail subscriber growth. Sprint only added 293 thousand subscribers compared to 572 thousand in the fourth quarter of 2011 and 310 thousand in the first quarter of 2011. While it may be the only national carrier with unlimited data, unlimited data is meaningless unless good service can support it. Oddly enough this could benefit Clearwire (CLWR), one of Sprint's investments, as it could help expand coverage areas and ease network pressures.
Although we think Sprint is well-positioned to add subscribers and improve service, we think shares are fairly valued. Revenues may grow, but they might not grow very profitably if users continue to switch to iPhones, like we think they will. The one benefit Sprint could see from iPhone market share growth is better negotiating leverage against the other manufacturers. If customers are willing to pay for iPhones rather than those powered by Google's (GOOG) Android, we think manufactures on the Android platform could cut prices in order to stay relevant. Regardless, with a massive debt-load, no dividend, and really no near-term catalysts, we don't view Sprint as a very compelling investment opportunity at this time.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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