The third-largest U.S. wireless carrier Sprint Nextel (S) has reported a better-than-expected third quarter of 2011. Net loss per share of 10 cents bettered the Zacks Consensus Estimate of a loss of 22 cents.
Consolidated operating revenue grew 2% year over year to $8.33 billion but fell short of the Zacks Consensus Estimate of $8.37 billion. The revenue improvement was driven by strong post-paid average revenue per user (ARPU) and healthy prepaid subscriber additions. The quarter marked the best wireless net subscriber addition in last five years.
Adjusted OIBDA (operating income/loss before depreciation, amortization, asset impairments and abandonments) increased 5% year over year to $1.4 billion.
Segment Results
Wireless revenue increased 4.8% year over year to $7.5 billion. Sprint gained approximately 1.3 million subscribers in the reported quarter, representing a net addition of 789,000 in retail subscribers and 835,000 in wholesale and affiliate subscribers.
Sprint lost 44,000 net post-paid customers during the quarter, which reflects a considerable improvement from a net loss of 107,000 customers in the year-ago quarter and 101,000 subscribers in the previous quarter. The company added 265,000 post-paid subscribers from the CDMA network while lost 309,000 customers from the iDEN network.
With regard to prepaid subscription, Sprint added 485,000 customers, which represents a net addition of 839,000 CDMA customers, partially offset by a net loss of 354,000 iDEN customers.
At the end of the third quarter, Sprint had 53 million customers (including 32.9 million post-paid, 14.3 million prepaid and 6.3 million wholesale and affiliate) compared with 48.8 million in the year-ago quarter.
Post-paid ARPU increased to $58 from $55 in the year-ago quarter as higher monthly recurring revenue counterbalanced lower overage, casual data and text revenues. This is the largest year-over-year post-paid ARPU growth in 12 years. Prepaid ARPU declined year over year to $27 in the third quarter.
Sprint posted post-paid churn of 1.91% in the reported quarter, compared with 1.93% in the previous-year quarter and 1.75% in the previous quarter. The year-over-year improvement was driven by increased customers subscribing to fixed rate plans on 4G handsets. Prepaid churn improved to 4.07% from 5.32% in the previous-year quarter and 4.14% in the previous quarter. The improvement was attributable to the lower churn of Boost Monthly Unlimited subscribers and Assurance Wireless customers. Prepaid churn also gained from better churn rates of Virgin Mobile and Boost Mobile.
Wireline revenues dropped 15% year over year to $1.1 billion, as erosion in voice and Internet revenues declined 14.4% and 16.5%, respectively. Data revenues remained flat year over year at $124 million.
Liquidity
Sprint enjoys a strong balance sheet, with approximately $3.8 billion in cash and short-term investments at the end of third quarter compared with $4.7 billion at the end of 2010. Long-term debt declined to $14.5 billion from $14.7 billion at the end of 2010.
The company spent $760 million in the reported quarter compared with $462 million in the year-ago quarter. Sprint generated a negative free cash flow of $273 million, compared with a positive $384 million in the year-ago quarter.
Guidance
For fiscal 2011, Sprint Nextel is still hopeful of improved post-paid and total net wireless subscriber additions. The company maintains its capital expenditure expectation of approximately $3 billion for fiscal 2011. The company expects free cash flow between negative $200 million to a positive $100 million for fiscal 2011.
Our Analysis
Despite the uncertainties surrounding the proposed merger of AT&T (T) and Deutsche Telekom’s unit T-Mobile USA and the economic downturn, Sprint has managed to taper its losses backed by strong wireless business, advanced product and service offerings and unlimited data plans. With the recent launch of Apple’s (AAPL) iPhone 4 and iPhone 4S, the company is expected to register new highs in its wireless business given the growing craze for new age devises.
However, Sprint is turning its business around and gaining ground following various contracts wins, the appointment of the new CFO, and resolution of the wholesale pricing dispute with Clearwire (CLWR).
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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