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Sprint Splashes More Red With Results As Questions On Future Linger
2/8/2013 10:34:00 AM
Sprint ( S ) revenues grew by a paltry 3% y-o-y to $9 billion and net losses amassed to $1.3 billion in Q4 and $4.3 billion for 2012. It added a net 401,000 postpaid subscribers to its core Sprint platform (excluding Nextel losses) which is a huge decline from 539,000 net additions in Q4 2011. Subscribers are continuing to flee the Nextel iDEN network as Sprint has accelerated its shutdown and has been unable to retain these users. The company reported a 51% conversion rate in Q4, down from 59% last quarter. Excluding the Nextel conversion, Sprint added a disappointing 68,000 non-Nextel subscribers in the fourth quarter.
The telecom company managed to generate only $216 million of cash from operations - a significant decline from the nearly $1.1 billion generated in Q4 2011. Sprint's capital expenditure grew by 62% to about $1.5 billion, and we expect the company to be cash flow negative for the next several quarters.
iPhone Strategy Is Burning Cash
Sprint has been incurring heavy annual postpaid subscriber losses for a long time now and it was expected that carrying the iPhone would plug the leak. Unfortunately, this hasn't worked out for the company. While Sprint has been showing net subscriber additions, losses from Nextel far exceed gains. It is evident that Sprint is losing market share and taking on a huge commitment of nearly $15.5 billion to Apple over a four-year period might have been a bad move in hindsight. This was a massive bet considering the company has a highly leveraged balance sheet with over $24 billion in long-term debt and that the iPhone is experiencing significant competition in the smartphone segment. Sprint reported it sold 2.2 million iPhones in the fourth quarter and 6.6 million in 2012.
Postpaid ARPU declined by 17 cents to $63.04 from Q3 2012 and we expect ARPUs to remain around $63. However, considering that Sprint offers unlimited data plans, the ARPU data is skewed as most smartphone subscribers would opt for the unlimited plan. Unlike the other carriers who don't offer unlimited plans in an effort to make up for the huge subsidies they offer on smartphones, Sprint is losing money by offering an unlimited data plan. The rationale behind the move was to capture market share from AT&T and Verizon, but it doesn't seem to work especially since both carriers have been adding subscribers in record numbers while Sprint's numbers are disappointing.
SoftBank Merger Needs To Happen
Management refused to discuss either the Softbank merger or the Clearwire acquisition on the earnings call. However, after this quarter we believe that Sprint needs the Softbank merger to go through more than ever. With shrinking market share in the postpaid segment, Sprint needs capital infusion from Softbank to compete aggressively going forward.