iPhone Subsidy Ups Sprint's Loss - Analyst Blog

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Sprint Nextel ( S ) reported better-than-expected fourth quarter 2011 results. Adjusted loss per share of 35 cents bettered the Zacks Consensus Estimate of a loss of 38 cents.

Adjusted net loss excludes the negative impact of $241 million, or 8 cents per share related to asset and impairment charges, investment in Clearwire and severance costs. On a GAAP basis, the company reported net loss per share of 43 cents, which deteriorated 39% from the year-ago quarter's loss of 31 cents primarily due to heavy subsidies on iPhone. 

Net loss for fiscal 2011 improved 17% year over year to 96 cents.

Consolidated operating revenue for the fourth quarter grew 5% year over year to $8.7 billion, and was in line with the Zacks Consensus Estimate. The year-over-year growth was driven by higher wireless service and equipment revenue that compensated for the lower wireline revenues. For the full year, consolidated operating revenue rose 3% year over year to $33.7 billion.

Quarterly adjusted OIBDA (operating income/loss before depreciation, amortization, asset impairments and abandonments) plunged 36% year over year to $842 million. The decline was primarily due to higher iPhone subsidies and sales expense, wireless service cost and lower wireline revenues that offset the positive impacts of higher postpaid and prepaid wireless service revenues. Adjusted OIBDA for the full year was down 10% year over year to $5.1 billion.

Segment Results

Wireless operatingrevenue increased 7% year over year to $7.9 billion. Sprint gained approximately 1.6 million subscribers in the reported quarter, representing a net addition of 668,000 in retail subscribers and 954,000 in wholesale and affiliate subscribers.

Growth was driven by strong wireless service revenues, backed by record post-paid average revenue per user (ARPU) that increased by $3.69, representing the largest ever year-over-year growth across the domestic wireless industry.  

Sprint gained 161,000 net post-paid customers during the quarter, which almost tripled from a net gain of 58,000 customers in the year-ago quarter. The company added 539,000 post-paid subscribers from the CDMA network, while it lost 378,000 customers from the iDEN network. With regard to prepaid subscription, Sprint added 507,000 customers, which represents a net addition of 899,000 CDMA customers, partially offset by a net loss of 392,000 iDEN customers.

At the end of the fourth quarter, Sprint had 55 million customers (including 33 million post-paid, 14.8 million prepaid and 7.2 million wholesale and affiliate) compared with 49.9 million in the year-ago quarter.

Post-paid ARPU increased to $58.59 from $55.26 in the year-ago quarter, boosted by higher monthly recurring revenue. This is the largest year-over-year post-paid ARPU growth in the company's record. Prepaid ARPU declined year over year to $26.62 in the fourth quarter from $27.95 in the year-ago quarter.

Post-paid churn was 1.98% in the reported quarter, compared with 1.86% in the previous-year quarter. The decline resulted from the temporary impact of higher deactivations of customers due to non-payment of bills or violations of terms and conditions.

Prepaid churn improved to 3.68% from 4.93% in the previous-year quarter. The improvement was attributable to the growth of Assurance Wireless customers. Prepaid churn also gained from better churn rates of Virgin and Boost Brands.

Wireline revenues dropped 14% year over year to $1.1 billion, as erosion in interconnection charges, voice and Internet revenues that declined 12.4% and 14.2%, respectively. Data revenues declined 16.3% year over year.

Liquidity        

Sprint enjoys a strong balance sheet, with approximately $5.5 billion in cash and cash equivalents at the end of fiscal 2011 compared with $5.2 billion at the end of 2010. Net debt in the full-year 2011 remained flat from the year-ago level at $14.7 billion.

The company spent $2.9 billion in the year 2011 compared with $1.9 billion in the year-ago. Sprint generated a free cash flow of $429 million, compared with $2.5 billion in the year-ago period.

Guidance

Sprint expects 2012 adjusted OIBDA to be in the range of $3.7 - $3.9 billion. Full-year consolidated net service revenue growth is expected to range between 4-6%. For 2012 capital expenditures are estimated to be approximately $6 billion. The company expects debt maturities of $300 million in May 2013 and $1.5 billion due in October 2013.

Sprint expects to add approximately 12,000 sites by the end of 2012 and complete the majority of its Network Vision deployment in 2013. In addition, Sprint expects to roll out 4G LTE by mid 2012. Houston, Dallas, San Antonio and Atlanta, Kansas City and Baltimore will be among the first six major cities to launch.

Our Analysis

Despite the adverse impacts of iPhone subsidies Sprint has managed to gain strongly from its wireless business with improved churn, ARPU, increased penetration of handsets, advanced product and service offerings and unlimited data plans.

With the launch of Apple 's ( AAPL ) iPhone 4 and iPhone 4S, coupled with the Network Vision plan, the company is expected to register new highs in its wireless business given the growing demand for new age devices. Nevertheless, increased competition from market leader like AT&T ( T ), heavy investments, funding issues, iPhone subsidies and continued wireline margin pressure keep us cautious on the stock.

We are currently maintaining our long-term Neutral recommendation on Sprint. For the short term, the stock retains a Zacks #3 (Hold) Rank.


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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