Seeking Alpha
Long/short equity, deep value, value, special situations
Profile| Send Message|
( followers)  

In our June report comparing Sprint Nextel (S) to Nokia (NOK), we analyzed the progress of those once-great telecom titans in turning around the weak performance that both companies have been enduring since the beginning of 2006. We elaborated on how both companies were pioneers in the mobile communications industry in that Nokia introduced the first car phone "Mobira Senator" in 1982 and Sprint built the nation's first national digital PCS mobile communications network from the ground up without the benefit of the Bell System monopoly and the first all-digital, fiber optic telecommunications network. We discussed how both firms saw shocking revenue declines and losses, value-destroying acquisitions and have seen company credit ratings cut to junk during the last five years. We also remembered that both companies have made significant strategic realignments in each firm's respective business models since the 19th century inception of each firm's predecessor company (Nokia was a diversified industrial conglomerate and Sprint was a rural local exchange carrier in Kansas). Our thesis underlying the creation of our June report was that Sprint was a better telecom turnaround story, and we were able to conclude that our thesis was met. Here is why we see Sprint continuing to make more progress than Nokia in its corporate turnaround:

Revenue Trends

Sprint Nextel: We were ecstatic when Sprint came out with its Q2 2012 results because its year-over-year wireless platform revenue grew at a faster rate than Verizon Wireless (VZ) or AT&T Mobility (T). An even bigger positive takeaway with regards to revenue growth between Sprint Nextel versus the AT&T-Verizon duopoly is that AT&T Mobility's YoY revenue growth rate declined by 60bp for the Q2 2012 period versus what was achieved in the Q1 2012 period. Verizon Wireless's YoY revenue growth rate declined by 40bp for the Q2 2012 period versus what was achieved in the Q1 2012 period. Sprint Nextel's YoY revenue growth rate for its wireless operations for Q2 2012 grew by nearly 101bp versus what was achieved in the Q1 2012 period. That confirms our thesis that what Sprint may not be the best wireless communications company in terms of revenues and profits, it has positioned itself to be the best wireless carrier and it is serving to sap the growth rates of AT&T Mobility and Verizon Wireless.

Source: Q2 Wireless Company Earnings Releases

Nokia: Nokia's revenue results in the most recent quarter were not as positive as Sprint's. Unfortunately for Nokia, it did not even have positive year-over-year revenue growth in any of its divisions except for 4% growth by the Nokia Location & Commerce Division. Nokia's Location & Commerce business was the legacy Navteq operations, and Nokia incurred a €1.04B asset impairment write-down for the division last year. Nokia Location & Commerce is Nokia's smallest division and represents less than 4% of Nokia Corporation's revenue. While Nokia Corp had positive linked quarter revenue growth of 2% in Q2 2012 versus Q1 2012, that achievement was primarily due to positive seasonality trends in its Nokia Siemens telecom equipment business. In short, we can conclude that Nokia's revenue trend is worse than Sprint's because Sprint's weakest division is its Long-Distance Wireline business and that division's revenue decline was only 8.7%, versus a 19% decline in Nokia's revenues.

Source: Sprint and Nokia's Q2 2012 Earnings Releases

Free Cash Flows Trends

Sprint Nextel: Sprint Nextel earned $209M in free cash flow during the most recent quarter even though its capital expenses have increased 22% in Q2 2012 versus Q2 2011 levels, by 112% versus Q2 2010 levels and by 189% versus Q2 2009 levels. We're not happy that Sprint's free cash flows are temporarily depressed in order to fund Network Vision network upgrade project; however, if it wasn't for Network Vision, Sprint wouldn't have earned the right to sell Apple's (AAPL) cutting-edge iPhone smartphone device and Sprint would probably have to declare bankruptcy. Sprint's Network Vision project has enabled it to join the AT&T/Verizon duopoly in offering wireless services on the 4G-LTE wireless network protocol as well as scrapping the old archaic 2G Nextel iDEN network.

Source: Bloomberg LP

Nokia: Nokia's cash flow picture was not as pleasant as Sprint's. Nokia only generated €102M in operating cash flow in Q2 2012 and spent €115M on CapEx. Nokia harvested €67M from the sale of assets and proceeds from loan receivables, but its €55M free cash flow during the quarter was significantly less than Sprint's even though Sprint had boosted its CapEx and Nokia's CapEx during Q2 2012 versus the comparable period last year.

Source: Sprint and Nokia's Q2 2012 Earnings Releases

Telecom and Technology Partnerships

Sprint: Sprint has partnered with Ericsson to manage its network since 2009. Unlike Nokia Siemens, Ericsson is profitable and it has avoided the worst of the telecom equipment weakness due to Sprint's Network Vision. While Sprint's handset lineup is comparable to the AT&T/Verizon duopoly, the key smartphone it offers is Apple's iPhone. With regards to Sprint's handset product offerings, there is the iPhone and then there is the iPhone's competition. Since Sprint has earned the right to sell the iPhone last October, it has sold 4.8M iPhones in three quarters that it has been selling the iPhone. 40% of Sprint's iPhone sales in Q2 2012 were to new customers and Sprint's iPhone sales to new customers were 600K during the quarter. This was comparable to the 675K new customers that bought an iPhone through Verizon and the 814K new customers that bought an iPhone through AT&T. Sprint's tablet computing lineup is not as robust as the AT&T/Verizon duopoly, however, it offers the Lenovo IdeaPad and the ZTE Optik, and that is more than what Nokia can offer. Sprint's iPhone sales volume in Q2 2012 was higher than Nokia's North American sales volume in the comparable period.

Source: Q2 Wireless Company Earnings Releases

Nokia: Since Nokia's CEO Stephen Elop fired off the infamous Burning Platform memo in February 2011, Nokia has abandoned its Symbian operating system in favor of Microsoft's (MSFT) Windows Phone platform. Nokia announced its first four Nokia Lumia devices in November and enlisted AT&T to heavily promote the Nokia Lumia 900 in exchange for being the exclusive home of the Nokia Lumia 900 in the US. Despite $150M of AT&T's money and pressure from AT&T's management to the sales force to push Lumia phones, only 600K Lumia phones were sold in North America and Bernstein & Company estimated that 250K Lumia 900s were sold at AT&T. Nokia Nation can take heart that Verizon will be working with Nokia to eventually sell Nokia Lumia Windows 8 Phones. Nokia executives haven't yet confirmed pricing, specific timing or details about where the devices will be sold. Now that Nokia flubbed its new Lumia product launch while Sprint is already preparing for iPhone 5 sales, we can see that Sprint's telecom and technology partnerships are better than Nokia's.

Source: Sprint and Nokia's Q2 2012 Earnings Releases

Macroeconomic environments

Nokia has more global diversity than Sprint. Nokia has access to fast growing markets in Asia, Latin America and Africa, as well as slow-growing markets in Europe and North America. Europe and North America have seen the sharpest declines in sales volume for its mobile devices. However, Nokia's Chinese unit sales were a real disaster-piece, declining by 62% in Q1 2012 versus Q1 2011 and Nokia China followed up that performance in Q1 2012 with a 41% revenue decline in Q2 2012 versus Q2 2011. We thought that the Chinese market was supposed to be Nokia's saving grace, according to Nokia bulls. Sprint generates all of its revenues from the US, which we believe will perform better than Europe and offers greater potential than consensus economic estimates in 2013 and beyond. We have also seen that the emerging markets and BRIC countries are seeing decelerating growth and increased investment risks.

Conclusion

Based on these 4 reasons, we conclude that Sprint offers a much greater likelihood of turnaround potential in the telecom sector instead of Nokia. Aggressive investors may want to finance a long position in Sprint by entering into a short position with Nokia. We can see how even while Sprint was in the midst of a multi-year, multi-step transition process, it was still able to outperform Nokia by a wide margin since the end of 2008. We can see that both companies are gambling on a revolutionary smartphone. Sprint is gambling its company's future on selling the Apple iPhone and Nokia is hoping to restore its growth and profitability with the Nokia Lumia 900 Windows phone. We are surprised that Nokia does not currently make phones available for the Verizon and Sprint networks, since those two companies comprise about 50% of the US wireless carrier market. So far we find much greater momentum for Sprint and its Apple iPhone partnership than Nokia and its Windows phone partnership with Microsoft and AT&T. Sprint Nextel has caught up to AT&T or Verizon and may never catch up to that duopoly but it is obviously that at least Sprint's not as bad Nokia.

Source: Morningstar Direct

Source: Sprint's Turnaround Is Stronger Than Nokia's

Additional disclosure: This article was written by an analyst at Saibus Research. Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this article. We have no business relationship with any company whose stock is mentioned in this article. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.