Rob Black's Telecom Stock Report

Includes: GOOG, S
by: Rob Black
Sprint-Nextel's (NYSE:S) plans to build a WiMax network over 100 million pops starting in 2007. Let’s look at potential implications on Sprint's numbers as well as on the named vendors, Motorola (MOT) and Samsung. Analysts are also lowering net add estimates for Sprint in 3rd quarter 2006 from 25k postpaid to -150k, and Boost to 300k from 400k.

Sprint has said that it expects to spend $1 billion in 2007 and $1.5-2 billion in 2008 in 4G Capex, plus additional Opex that could dilute 2008 EBITDA as much as 5% ($650mm on our 13b estimate for EBITDA in 2008). Though the business case remains fuzzy, the business will start with wireless data access to laptops and desktops, similar to Nextel's Virginia trials in 2004. A private company called Clearwire has a similar business model today, and we can use its pricing plans as a model to estimate Sprint's ARPU at around $35. If WiMax chips become pervasive in consumer electronics, Sprint's ARPU and CPGA could fall, but penetration would increase substantially.

Overall, most of Sprint's potential FCF over the next 2 years will be claimed by the spectrum swap ($2.4 billion 2006-2008) and 4G build ($3-4 billion 2007-2008). In addition to these expenses, is Sprint's FCF, that could go to dividends or stock buyback amounts which would be at only $3.2 billion in 2007 ($1.06/share) and $2.7 billion in 2008. Given that Sprint's will likely have an operational weakness in 2nd half of 2006 and a weakened FCF, we recommend that investors stay on the sidelines at this level.

Sprint has named Motorola and Samsung as primary vendors on the 4G build, but checks indicate that Sprint expects to name one or possibly two additional infrastructure vendors based on an RFP. Assuming that 70% of Sprint's Capex goes to vendors and Motorola and Samsung each get 30% of the spend, this would imply about 210mm for Motorola revenue in 2007 and $370mm in 2008. While fairly small, this and other WiMax revenue could be important in driving Networks growth for the next 2 years.