Sprint's Storm Before The Calm

| About: Sprint Corporation (S)

Last week, telecom giant Sprint (NYSE:S) reported its fiscal third quarter earnings. The report was mostly mixed. Sprint's revenues were a little light, with earnings per share beating estimates. A lot of the costs that have put Sprint into the red in recent years weren't as great this quarter, fueling a bottom line beat. Also, some metrics saw improvement, while other metrics declined. The balance sheet weakened a little more, but this was expected. Sprint is in the worst period of the storm, with conditions expected to improve later into 2013, especially if the Softbank deal goes through. Let's look at where Sprint stands after the latest quarterly report.

Third Quarter Results:

Sprint reported Q3 revenues of $8.763 billion, which was a little below the $8.81 billion expected. However, an earnings per share loss of 26 cents was much smaller than an expected 42 cent loss.

The following table shows Sprint's Q3 margins over the past few years. I will use these numbers to further analyze the quarter.

Sprint's Q3 revenues were up 5.16% over the prior-year period. The cost of services was down 4.69% over that time, but the cost of products rose by 34.63%. Obviously, a lot of that has to do with Apple's (NASDAQ:AAPL) iPhone. Gross margin dollars declined by 1.4%, which led to the above decline in overall gross margins.

Selling and general expenses were up slightly more than 3%. Depreciation expenses were up almost 25% over the prior-year period to about $1.49 billion. That's not a surprise, and is actually down from the roughly $1.9 billion of depreciation expenses in Q2. Overall, operating expenses rose by $387 million over the prior-year period. That meant that operating income declined by $439 million, going from an operating profit to a loss. You can see that above as operating margins went from a positive number to a negative one.

The company also faced higher interest costs, $377 million this year as opposed to $236 million last year. But, the losses related to Sprint's equity investments, mainly regarding Clearwire (CLWR), were $149 million lower than the prior year.

On the bottom line, Sprint lost $767 million compared to a loss of $301 million in the prior-year period. That's reflected in the profit margins above. But like I said before, analysts were expecting a much larger loss, one of roughly $1.2 billion or so. The fact that Sprint's depreciation expenses and equity losses weren't too bad probably had a lot to do with the smaller loss.

Balance Sheet Update:

As Sprint continues to go through a transitional period, the balance sheet has gotten worse. This goes back to the title of my article, the storm before the calm. Sprint's balance sheet is expected to improve during 2013 as results improve, and also if the Softbank deal goes through. The Softbank deal should provide some capital that Sprint could use to repay some of its debt. The following table shows some key balance sheet ratios over the last several quarters. Dollar values shown are in millions.

The balance sheet has gotten worse in recent quarters. Working capital declined in the period, and that's also reflected in the current ratio. The company's debt pile increased slightly. The debt (liabilities to assets) ratio increased another 1.5 percentage points. The company now has $2.50 of debt for every dollar of equity on the balance sheet, and $4.76 of liabilities for every dollar of equity.

Like I said, if the Softbank deal goes through, the balance sheet should start to improve. However, until that time, Sprint might need to raise more capital to fund operations and the network upgrade, which they reported a delay on last week.

Other Reported Numbers:

There are a number of other numbers Sprint reported that investors tend to focus on, so here they are:

  • Nearly 900,000 Sprint platform net additions.
  • ARPU (average revenue per user) growth of nearly 5% year over year. However, ARPU actually declined by 0.27% over Q2 levels.
  • Best ever third quarter for both Sprint platform postpaid churn of 1.88% and Sprint platform prepaid churn of 2.93%.
  • Nextel recapture rate of 59 percent.
  • Approximately 1.5 million iPhones sold - 40% to new customers.
  • 4G LTE now launched in 32 cities, with over 115 more expected in the coming months.

Conclusion / Final Thoughts:

While the balance sheet is getting worse at the moment, I've been telling you over the past year or so to expect that until early to mid 2013 at the earliest. Sprint's third quarter wasn't great, but it wasn't terrible either. I would have liked to see a few more iPhones sold, which would have helped ARPU numbers. However, the bottom line loss wasn't too bad. The network delay is a bit of an issue, since Sprint's network is a bit behind those of its competitors.

As for the stock, if you believe in the recovery of Sprint, this is a name to consider being long. But there is an issue with that, and it relates to the Softbank deal, which is a very complex transaction. There are several parts to the deal, and shares of Sprint could end up trading at a lower price after the deal is completed. So while Sprint is improving and the Softbank deal could get the company partially out of a large debt hole, investors might want to wait until the Softbank deal is completed before buying Sprint.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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