Sprint Beats Ests, Loss Widens Y/Y - Analyst Blog

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The third-largest U.S. wireless carrier Sprint Nextel Corp. ( S ) reported better-than-expected first quarter 2012 results, before the opening bell. Adjusted loss per share of 17 cents bettered the Zacks Consensus Estimate of a loss of 42 cents. However, the adjusted loss was wider than the year-ago loss of 15 cents.

Despite the heavy subsidies associated with Apple Inc. ( AAPL ) iPhones, Sprint outperformed our expectations on strong revenue growth and cost-cutting measures.

Adjusted net loss per share excludes accelerated depreciation of 18 cents related to the shutdown of the Nextel platform and one-time benefit of 6 cents from the LightSquared spectrum termination contract. Including these special items, the company reported net loss per share of 29 cents, plummeting 93% from the year-ago loss.

Revenue grew 5% year over year to $8.73 billion, outpacing the Zacks Consensus Estimate of $8.71 billion. The year-over-year growth was driven by higher wireless service and equipment revenue that compensated for lower wireline revenues.

Adjusted OIBDA (operating income/loss before depreciation, amortization, asset impairments and abandonments) deteriorated 20% year over year to $1.2 billion in the reported quarter. The decline was primarily due to higher iPhone subsidies, wireless service cost and lower wireline revenues that offset the positive influences of higher post-paid and prepaid wireless service revenues.

Segment Results

Wireless operating revenue increased 7% year over year to $7.9 billion.

Sprint gained approximately 1.08 million subscribers in the reported quarter, representing a net addition of 297,000 in retail subscribers and 785,000 in wholesale and affiliate subscribers.

Sprint lost 192,000 net post-paid customers during the quarter, more than a loss of 114,000 customers in the year-ago quarter. The Sprint platform added 263,000 post-paid customers while the Nextel platform lost 455,000. With regard to prepaid subscription, Sprint added 489,000 users, which represents a net addition of 870,000 CDMA customers, partially offset by a net loss of 381,000 iDEN customers.

At the end of the first quarter, Sprint had 56.1 million customers (including 32.8 million post-paid, 15.3 million prepaid and 8 million wholesale and affiliate) compared with 33 million in the year-ago quarter.

Sprint sold more than 1.5 million iPhones, versus 3.2 million sold by Verizon Communications Inc. ( VZ ) and 4.3 million by AT&T Inc. ( T ). About 44% of the iPhone customers were new to Sprint.

Post-paid ARPU increased to $59.88 from $56.17 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 history. Prepaid ARPU declined to $26.82 from $28.39 in the year-ago quarter due to the growth in Assurance Wireless customers, who have lower ARPU on average.

Total post-paid churn (customer switch) increased to 2.01% in the reported quarter from 1.81% in the year-ago quarter and 1.98% in the prior quarter. This increase resulted from the higher temporary deactivations due to non-payment of bills or violations of terms and conditions.

Prepaid churn improved to 3.61% from 4.36% in the previous-year quarter and 3.68% in the last quarter. The improvement was attributable to the continued growth of Assurance Wireless customers. Prepaid churn also gained from better churn rates of Virgin and Boost Brands.

Wireline revenues dropped 11% year over year to $998 million, owing to reduced interconnection charges and continued declines in voice and cable IP volume.

Liquidity       

Sprint has strengthened its balance sheet with approximately $7.1 billion in cash and cash equivalents as of March 2012 compared with $3.7 billion in the same month a year ago. Net debt remained stable with the prior quarter at $14.7 billion.

The company spent $800 million in the first quarter, compared with $555 million in the year-ago quarter. Sprint generated free cash flow of $138 million versus $178 million in the year-ago quarter.

Guidance

For fiscal 2012, Sprint expects net service revenue to grow 4-6% and adjusted OIBDA to be on the high end of the previous guidance of $3.7-$3.9 billion. Capital expenditures are estimated to be approximately $6 billion.

Sprint is advancing its Network Vision plan as expected. The company expects to add about 12,000 sites by the end of this year and complete the majority of its deployment in 2013. In addition, Sprint continues to expect the initial deployment of 4G Long-Term Evolution (LTE) services in six markets, including Atlanta, Baltimore, Dallas, Houston, Kansas City and San Antonio by mid year.

Our Take

Despite the economic downturn, Sprint is trying to taper its losses on the back of strong wireless business with reducing churn, improving ARPU, increasing penetration of handsets, advanced product and service offerings, and unlimited data plans. In addition, the company continues to benefit from the Network Vision plan and the sale of iPhones that are expected to register new highs in its wireless business.

Nevertheless, stiff competition, heavy investments, lofty iPhone subsidies and continued wireline margin erosion keep us cautious on the stock.

We currently maintain our long-term Neutral recommendation on Sprint. For the short term (1-3 months), 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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