Edited by Adam Isaac
It has been a phenomenal year for Sprint Nextel (S); the stock has gained more than 120 percent since the start of the year. The company had been under pressure from the wireless industry, fighting its competitors to be the largest carrier after Verizon Communications Inc. (VZ) and AT&T Inc. (T), as well as facing large amounts of its own debt. However, in recent months, the company has changed its strategy and modernized its operations. In addition, closure of Nextel operations by June 30, 2013 will be beneficial to Sprint. The company had been trying for some time to offload the Nextel network, thereby shedding what amounts to a $36 billion burden. For the first quarter of 2012, Sprint wrote down only $543 million as the value of Nextel, compared to $29.7 billion in 2008. Sprint Nextel has been suffering considerably since the merger, since it was unable to forge new synergies as had been predicted.
Sprint will fill the gap left by Nextel's 2G services with the launch of a new 4G-LTE network. The firm is hopeful that former Nextel customers will transition smoothly to Sprint's new "Direct Connect" technology, which most notably offers a push-to-talk facility.
Sprint reported a net loss of $1.4 billion, or $0.46 per share. The loss is significantly greater than that reported a year ago. However, such losses mainly arise from the winding down charges of Nextel network. Overall, the closure of Nextel will be highly beneficial for Sprint revenue. In particular, the company predicts it will be able to retain 60 percent of customers from the Nextel network. Most notable among these is the Federal Emergency Management Administration (FEMA), which had been on the Nextel network for its push-to-talk feature, but has already agreed to transition over to the Sprint network.
This quarter sales of the iPhone have also declined, though this can be easily attributed to customers delaying their purchases for the release of the newest edition. Sprint has committed to spending $15.5 billion on Apple (AAPL) iPhones in the next few years and they ought to make much of this money back as the release of the iPhone 5 boosts sales. The closure of Nextel operations will further augment this company's bottom line.
Meanwhile, Sprint has been successful in decreasing its churn rate, from 1.72 percent down to 1.69 percent. The company was also able to increase its average revenue per customer to now be over $63.
With its new Network Vision plan, Sprint certainly has high prospects. The most important factor in this plan will be the installation of the new 4G-LTE service - already the service is available in 15 cities, with five of these locations being major metro areas. The upgrade should be completed by the end of 2013. Sprint has also streamlined its operations, taking it in a positive direction. This strategy will soon enable Sprint to increase its revenues and report positive earnings. I expect Sprint to already be posting positive earnings by the first quarter of 2014. Yet, the company's cost saving strategy could also be its greatest worry. Sprint is currently offering unlimited data services at the lowest rates available. If sales slow then the company could face some problems.
Sprint recently managed to pay off $1.5 billion in debts before the amount matured. The amount paid included almost $500 million in bonds, due to mature in May 2013. Due to this aggressive approach, Sprint now has $5.8 billion in cash and cash equivalents, up from $5.2 billion for the same time last year. In addition, due to these early debt payments, the next debt obligation of $300 million is not due until May 2014. Sprint will thus have $1.4 billion in debt coming due in May 2014, with $1.6 billion due the subsequent year. At the end of the second quarter, Sprint had $21 billion in debt and capital lease obligations on the books. As a result of prudent financial management, the firm should therefore be able to tackle its debt and conduct a smooth change of its capital structure.
Sprint has made real progress in improving the business. In the latest quarter, the company produced $209 million in free cash flow - a remarkable achievement keeping in mind the large investments Sprint Nextel had to make for its network infrastructure. Sprint has $6.8 billion in the bank, which should be sufficient to fund its operations in the coming year. Sprint has also experienced significant improvements in its operating cash flows: it generated $2,155 million in operating cash flows, compared to $1,994 million in the same quarter last year. Over the last year, the company has shown that it possesses strong cash generation capabilities. Despite huge capital expenditures, the company remains confident that its strong balance sheet can endure the current spending levels. Current major capital spending will set the stage for concrete free cash flow growth in 2013 and beyond. As of June 30, 2012, the company had about $8 billion in liquid assets, consisting of $6.8 billion in cash, cash equivalents, and short-term investments.
Biggest threat to Sprint comes from its main competitors; Verizon Communications Inc. and AT&T Inc. are the biggest players in the wireless sphere at present. These two giants hold most of the market share between them, and would present a stern test for Sprint to snare market share from them. Sprint has taken a new direction, and the success would depend heavily on the success of this changed business model. Furthermore, the firm is following a cost leadership strategy; for this strategy to be successful, Sprint will need to add a significant number of new customers and retain sufficiently the existing ones. Although, the low cost offerings are sure to attract customers; it can also land the firm into hot water if things do not go as planned.
Moreover, competing on cost is always a risky strategy; if the business is not able to streamline its operations and procure on favorable rates, profits can turn into losses easily. However, I believe up till now; Sprint has been spot on in its efforts to change focus and the firm should be able to generate positive earnings soon. Although, it may have to consolidate in order to increase its foothold in the market. I will not be surprised if the firm makes a small acquisition in the near future, as indicated by the comments of the CEO. Telecom is a fiercely competitive industry, and consolidation may well be the way forward in this industry.
Sprint Nextel has revolutionized its business and, through some strong managerial decisions, is now back on the track to success. This telecom giant has consistently performed at the top of its industry for 2012. Sprint has turned its focus toward the fundamental problems it has been facing. After a tumultuous time in the company's history, the firm finally seems to be on the right track and dealing well with certain operational inefficiencies. In particular, Sprint is trying to increase its network coverage. There are therefore leasing agreements now in place for more than 12,700 network vision sites, and zoning requirements complete for about 13,900 sites. Sprint has had a challenging time over the last three years, but the tide seems to have turned. I expect the firm to generate healthy free cash flows and post positive earnings soon.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.